The transcript discusses the impact of the Federal Reserve's decisions on the US economy, particularly the raising of the federal funds rate and the potential for a recession. The speaker argues that the US is entering a new economic era, influenced by decisions made by the Federal Reserve, which has increased the federal funds rate by 500 basis points since a year ago. The rapid rate increase is believed to be due to the Federal Reserve getting behind the curve on managing interest rates.
The speaker warns that the quick increase in interest rates could lead to a decrease in the value of assets for those who borrowed money to buy equity or a house. The reversal of zero interest rates may not have the initial benefits expected, as it could lead to a hangover effect where the benefits of low interest rates are outweighed by the negative impacts.
The Federal Reserve's interest rate policy can influence the cost of living in America, affecting inflation and job prospects. The Federal Reserve acts as a group of mechanics controlling the speed of the economy through its benchmark interest rate. The speaker also discusses the potential impact of higher interest rates on wealth inequality and the job market.
The transcript also mentions the debate around the Federal Reserve's zero interest rate policy, which has been in place for over 15 years. The speaker argues that the policy has led to a rise in inflation and wealth inequality, but has also benefited certain demographic groups in the economy.
The speaker concludes by discussing the potential impact of higher interest rates on the job market and the economy, warning of a slower decade of job market gains and an increased risk of recession. The speaker also discusses the potential for a soft landing or a shallow recession at the end of the current rising interest rate environment, but notes that no one knows for certain yet.
1. The United States is entering a new economic era.
2. The environment is different than what was experienced over the past 15 years.
3. The Federal Reserve has made decisions that have led to this new era.
4. The Federal Reserve has raised the federal funds rate by 500 basis points since a little more than a year ago.
5. The speed of this hiking cycle is distorting Wall Street and reshaping personal finance in America.
6. Interest rates have been raised because the Federal Reserve got behind the ball.
7. There are risks that emerge when interest rates rise quickly.
8. The Federal Reserve can influence the cost of living in America by changing interest rates.
9. The Federal Reserve has a primary tool to sort of shift gears on the economy as needed, which is its benchmark interest rate.
10. The Federal Reserve is like a group of mechanics and the economy is their machine.
11. Lower interest rates and the economy speeds up, while raising interest rates slows the economy down.
12. Interest rates today stand above 5% as the Fed tries to slow the economy down and fight inflation.
13. The last couple of inflation readings came in better and better than expected.
14. The inflation fighting medicine that the Fed has introduced to the economy is having the intended effect.
15. The economy doesn't work for everybody or anybody.
16. The United States experienced very little inflation that gave central bankers the ability to drop interest rates to record lows.
17. Lower interest rates made jobs more abundant, a benefit for lower income workers.
18. Running the economy a little hotter might benefit groups that have a harder time trading up on their jobs.
19. Some of the long-running differences we see across different demographic groups in our economy, like black-white wage differentials, have declined as the economy has been running hot for these last several years.
20. When interest rates are low, you might have an easier time getting a raise, but low interest rates may make wealth inequality worse.
21. Wealth inequality tends to go up when interest rates are low because other assets go up in value.
22. In the United States, central bankers have kept interest rates near zero for the better part of 15 years.
23. Having interest rates at zero for such a long period of time is very unusual.
24. It's called the Zero Lower Bound.
25. In the past, major central banks, including the Fed, took interest rates to the effect of the lower bound to fight deflation.
26. Deflation is essentially defined as a phenomenon whereby prices decline.
27. That tends to delay economic activity and leads to a slump in economic activity.
28. When money is cheap or free, those that borrow money and then reinvest it tend to do better because their cost of borrowing is very low.
29. The economy grew steadily through the 20 tens as more cash went into risky investments, startups disrupted the transportation, housing, and tech industries.
30. But some companies can't handle today's higher interest rates. In the first half of 2023, there have been 41 corporate defaults in the US, the most of any region globally.
31. Banks and investors listen closely to the mechanics of the Fed. Adjustments to interest rates can change prospects for whole industries like tech or real estate, which in turn affects Wall Street and the banks.
32. When interest rate is low, mortgage rate tends to be low. People will have more borrowing power.
33. The same principle applies to commercial real estate.
34. Many bets made in the low interest rate era are no longer panning out.
35. Mortgage is actually one of the largest asset categories on banks balance sheet.
36. When interest rate increases, the market value of those long term assets will decline even if there is no default risk.
37. We're talking a huge amount of unrealized losses in the banking sector.
38. If there is going to be a commercial real estate default, then the whole banking sector is going to have trouble.
39. Erica Jong and her team believe that more US banks could collapse in the new economic era.
40. The Fed's interest rate can change how much risk Wall Street is willing to take on.
41. Banks like to hold some portion of their assets in a kind of more