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A graph comparing the US Federal Funds Effective Interest Rate with the year-on-year percentage change in inflation.

Luisa Vieira

The Graphic Truth: US interest rates vs. inflation

All eyes are on the US Federal Reserve, as it is set to announce Wednesday whether it’ll raise interest rates amid the recent banking turbulence.

The Fed’s decision will hinge on what central bankers think is a bigger priority: fighting inflation or stabilizing the financial sector following the recent collapses of Silicon Valley Bank and Signature Bank.

While it could stay the course in its inflation fight with another rate hike, the Fed is coming under growing pressure to ease investors’ anxieties by leaving interest rates be. But doing that risks giving in — temporarily, at least — to lasting inflation. The longer the Fed waits to control rising prices, the worse chance it has to reach its 2-3% inflation target without triggering a recession.

Also, high-interest rates are partly to blame for the recent financial turmoil on both sides of the Atlantic. Right-leaning critics argue that near-zero rates for too long made lending too cheap. Meanwhile, some on the left say that raising rates too quickly made borrowing too expensive, hurting the balance sheets of banks like SVB.

What do you think the Fed’s next move should be? Let us know here.

An illustrative stock chart and Credit Suisse logo displayed on a phone screen.

Jakub Porzycki via Reuters Connect

Europe now feels the US financial panic

It's been hell week for banks on either side of the Atlantic. Days after the collapse of Silicon Valley Bank and Signature Bank sent shockwaves through the US financial system, now Credit Suisse, a major European bank, is in serious trouble.

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U.S. President Joe Biden delivers remarks after the collapse of Silicon Valley Bank (SVB) and Signature Bank in Washington, D.C., March 13, 2023.

REUTERS/Evelyn Hockstein

SVB collapse: Don’t say the B-word

US President Joe Biden on Monday addressed the nation to assure Americans that, whatever the fallout from the collapse of Silicon Valley Bank, their deposits and the entire banking industry are both "safe."

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A pedestrian passes a "Help Wanted" sign in the door of a hardware store in Cambridge, Massachusetts.

REUTERS/Brian Snyder

US jobs soar despite Fed’s high interest rates

A stunning US jobs report on Friday showed that the US economy added a whopping 517,000 jobs in January, far more than the expected 187,000 – taking unemployment down to 3.4%, the lowest it's beensince May 1969. This, coupled with the 11 million US employment openings at the end of 2022, reflects a hopping job market. Experts attribute the surprise figures to there being so much pent-up labor demand that companies continue to hire, though the tech sector has seen a recent slew of layoffs. Job creation has increased in areas like housing and finance, which would normally be more sensitive to high interest rates.

Sounds pretty great, right? Not exactly. The Federal Reserve has been desperately trying to slow the economy and tamp down inflation by raising interest rates, with eight hikes since March 2022. More jobs, however, mean more money being heaped into the economy, so markets tumbled Friday morning as investors anticipated more interest rate hikes in response. That said, the hiring surge may give economists a reason to soften their predictions about a looming recession, or at least about its severity.

A man counts Lebanese pound banknotes at an exchange shop in Beirut, Lebanon.

Reuters

Hard Numbers: Lebanon devalues lira even more, Adani calls off share sale, Fed slows hiking pace, radioactive capsule found in Oz, Philippines opens more bases to US

90: Lebanon has devalued its currency by — wait for it — 90% as a condition for securing an IMF bailout for what remains of the country's battered economy. Although the central bank says this is a first step toward unifying the multiple exchange rates the Lebanese people use for different transactions, the new official value of the lira is still far above the black market rate that most people actually pay.

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US inflation slows a bit

GZERO Media

The Graphic Truth: US inflation slows a bit, but ...

The US inflation rate for August was released on Tuesday and the figures are sure to cause anxiety in the White House. Overall, the consumer price index, which measures a range of consumer prices, rose 8.3% from the same time last year – 0.2% more than many economists anticipated – though it’s down from 8.5% in July and 9.1% in June.

Indeed, the latest findings surprised many analysts who predicted that the drop in US gas prices in recent months – down from $5 a gallon in June to a current national average of $3.70 – is a sign that the economy is cooling across the board.

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Federal Reserve Chairman Jerome Powell arrives to testify before the US Senate.

Tom Williams via REUTERS

What We're Watching: US Fed's next move, China's stimulus, Chile's president needs a win

All eyes on Powell at Jackson Hole

Updated Aug. 26:Heard of Jackson Hole, Wyoming? That's where all the economic bigwigs from around the world are gathering for an annual three-day event focused on the state of the global economy. In a stark departure from his position throughout much of the pandemic that inflation would be “transitory,” US Federal Reserve Chair Jerome Powell said in a keynote address Friday that there would be “some pain” for households and businesses in the months ahead, noting that inflation continues to soar. Powell also said it’s likely that we’ll see a “softening of labor market conditions,” suggesting that record low unemployment – the current silver lining of the economy – could tick upwards. Indeed, the Fed chair sought to defend his track record to economists and central bankers, many of whom have been critical of him for waiting too long to raise interest rates. Many observers took Powell’s address as a sign that the Fed will continue to tighten monetary policy in the months ahead as inflation tops 8% over the previous year. What's more, some economists say the Fed could soon raise rates as high as 4% (its current target rate is 2.25-2.5%), sparking fears of a sharp recession. Still, inflation is mild in the US compared to parts of Europe, particularly the UK, where inflation is estimated to hit a whopping 18.6% early next year.

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What We Need To Know To Fix US Inflation | Economist Austan Goolsbee | GZERO World

What we need to know to fix US inflation

The recipe to fixing inflation depends on whether you see it as a demand or supply problem, economist and University of Chicago professor Austan Golsbee tells Ian Bremmer on GZERO World.

If inflation is being driven by too much stimulus, as economist Larry Summers believes, then the Federal Reserve is doing the right thing by raising interest rates to cool demand, Goolsbee explains. But if inflation is mostly due to the war in Ukraine or supply chain disruptions, rate hikes might result in stagflation.

US inflation is at a 40-year high and is therefore drives the perception among Americans that the economy is bad.

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