Why Interest Rates Take So Long To Affect The Economy

Federal Reserve leaders warned of monetary policy's "long and variable" lags numerous times in 2023. This term refers to the unpredictable speed at which interest rate changes can affect the economy. The higher borrowing costs that come with the Fed's decisions may slow economic growth for long periods of time. And in the short term, businesses and households may contend with moderately higher cost loans.

Chapters:
Cold Open: 0:00 - 01:14
Chapter 1: Lags 01:15 - 03:25
Chapter 2: When, exactly? 03:25 - 06:15
Chapter 3: Predictions 06:15 - 08:26

Produced by Carlos Waters
Animation by Christina Locopo
Supervising Producer Lindsey Jacobson
Additional Footage Getty Images
Additional Sources Federal Reserve Bank of Atlanta, Federal Reserve Bank of Dallas, Federal Reserve Bank of Kansas City, Reuters, Federal Reserve Bank of San Francisco

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Why Interest Rates Take So Long To Affect The Economy

[lawerencemiller]

Increasing interest rates are going to continue to increase bank failures because it puts their commercial paper and treasuries underwater. They need to freeze interest rates to prevent a deep recession in the economy. At the same time the White house needs to help industry to increase gas and oil output to reduce fuel prices. The war on oil only serves to increase energy prices which trickles out to the rest of the economy as inflation. Lowering interest rates, tightening the money supply, reducing government spending and increasing the cheap supply of fuel will result in reduced inflation and a booming economy.

[susangiggs]

America is presently besieged by the hydra-headed evil combo of inflation and recession. The worst aspect about this crisis is that consumers are piling up credit card debt. Credit card debt increased by 20% in April alone, while interest rates have doubled in a year. Inflation is so severe that customers are essentially going into debt to buy basic essentials. The collapse has certainly begun.

[benjamindavidson]

Increasing interest rates are going to continue to increase bank failures because it puts their commercial paper and treasuries underwater. They need to freeze interest rates to prevent a deep recession in the economy. At the same time the White house needs to help industry to increase gas and oil output to reduce fuel prices. The war on oil only serves to increase energy prices which trickles out to the rest of the economy as inflation. Lowering interest rates, tightening the money supply, reducing government spending and increasing the cheap supply of fuel will result in reduced inflation and a booming economy. Presto, no inflation and no recession. Of course there are a lot of other agendas out there that will never let all of that happen, so hello recession and sticky inflation.

[PatrickLloyd-]

Rate cuts commence in June 2024, taking 6-8 months to complete. A potential crash, if any, might occur by March 2025. The soft landing narrative is gaining traction, making this big recession everyone is calling for less likely. With $1 million from a business sale, I'm seeking profitable investment opportunities for the next 3 years.

[mikeshaunnessey]

Interest rate have been held artificially low for 2 decades. Operating an economy with close to 0 interest rates is stacking the deck for badly run companies. The companies end up operating with 0 cost of capital and nominally fixed labor costs ( workers have been making 10/15$ per hour for the last 20 year. This means that extremely bad managers of companies can make lots of money with very little cost. Now they are screaming that their free giveaways are being terminated. Good. Flush out the badly run companies.

[gregnelson]

I'm going to be using this in my macroeconomics class next semester! A great explainer for monetary policy lags~!

[Philippayne-sktj]

In every crisis, there is an opportunity, " as the saying goes. The 2024 recession, while challenging, presents unique avenues to amass wealth. First, it's essential to remember Warren Buffet's advice: "Be fearful when others are greedy, and greedy when others are fearful." During recessions, assets often undervalue. By investing wisely in stocks, real estate, or businesses during this downturn, you position yourself for significant returns during the economic recovery.
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[ryanwalters]

The higher rates are really punishing for most of the young people starting out. The most older people are actually benefiting cuz their savings accounts make more money from the higher rates.

[Jusincase]

I’m so poor working 45 hours a week at $15.00 that interest rates do not affect me at all. I’ll be poor either way if rates are high or low. At least I’m so busy working that I can’t worry about or else I’ll be homeless

[chamindasilva]

Very timely analysis of what is going on in the economy. Thanks.

[selenajack]

I think most lnvestors like myself right now are more interested in how we can enhance our earnings during this period of adjustment given the current economic difficulties that the country is experiencing in 2023. I'm at a crossroads deciding if to liquidate my $620k stock/bond portfolio, or just wait for favorable times since the market always recover.

[pauldietzmann]

Keep keep interest rate high Rise it more PEOPLE NEED TO START SAVING AND STOP BUYING HIGH PRICE BOATS CARS HOMES OTHER HIGH PRISE THINGS. RISE THE RATES FED

[justinjones]

Yeah inflation is just not affected by the service industry like restaurants you go to the grocery store and the prices are still sky high

[luislopes]

This documentary allowed me to recap the importance of interest rates in the economic lives of families!

The Interest Rate: is the amount a lender charges a borrower and is a percentage of the principal - the amount loaned.

The lower the interest rate, the more willing people are to borrow money to make big purchases, such as houses or cars. When consumers pay less in interest, this gives them more money to spend, which can create a ripple effect of increased spending throughout the economy. When the interest rate is high, it becomes more expensive for people to borrow money. It can slow down the economy because people have less money to spend. Higher interest rates can also lead to higher inflation, which is when the prices of goods, services, and interest rates rise.

Interest rates are put in place by government-owned Central Banks. The Central Bank controls how much money is available in the economy and sets the target interest rate. The Central Bank can buy and sell government bonds to change interest rates.

Be completely sure that the production of this type of documentary is relevant!
A Productive Week!

[alessandrobogoni]

Finance policy using interest rates set circles. With balance sheets we learn how these long terms decision affect the questioned economy. Granting consumers limiting productivity need the balance worked by the FED institution.

[ahndeux]

2:35 When they say "this cycle is might be different than .. prior cycles", you "SELL SELL SELL!"

[SnappyWasHere]

Rates need to stay high. 20+ years of free money got us over leveraged, overpriced housing, corporations running amok with stock buybacks, and inflation. We have to pay for years of playing.

[Adriana-wcko]

In light of the impending recession and the fact that inflation remains above the federal reserve 2% target in this time of conflicts and war, several leading market analysts have expressed their views on how dire they believe the economy will be, next recession and how far stocks may go. I need advice on what investment to make because i want to build a portfolio for my children that will be worth at least 800, 000 dollars

[holio]

I think they have brownian motion models for forcasting and they can predict the recession

[Tinisha-pvsx]

Just ''buy the dip'' man. In the long term it will payoff. High interest rates usually mean lower stock prices, however investors should be cautious of the bull run, its best you connect with a well-qualified adviser to meet your growth goals and avoid blunder