THE FATHER BLOG

Ok, I’m off topic again but this one is important for the Monday followers when I typically discuss Finance.

The Feds raised interest rates again. And this somehow slows inflation fears? Certain stocks and sectors rise while others fall or stay stagnant? How does all that work?

Raising interest rates helps reduce inflation by making borrowing more expensive, slowing consumer and business spending, and encouraging saving, which lowers overall demand and eases upward pressure on prices.

Mechanism of Action

When a central bank, like the Federal Reserve in the U.S., raises its benchmark interest rate (the federal funds rate), it influences the cost of borrowing across the economy. Higher interest rates increase the cost of loans for mortgages, cars, credit cards, and business investments. As borrowing becomes more expensive, consumers and businesses tend to spend less, which reduces demand for goods and services. Lower demand puts pressure on businesses to slow price increases, helping to curb inflation.

Encouraging Saving

Higher interest rates also make saving more attractive because deposit accounts, certificates of deposit (CDs), and other interest-bearing instruments yield more. When people save more, they spend less, further reducing demand in the economy. This combination of reduced borrowing and increased saving helps cool economic activity, which can slow the pace of price growth.

Impact on Inflation Expectations

Interest rate hikes can also influence inflation expectations. If businesses and consumers expect prices to rise more slowly in the future, they may adjust wages, prices, and spending habits accordingly. Stabilizing expectations is important because persistent high expectations can make inflation harder to control.

Broader Economic Effects

While raising interest rates can help control inflation, it is not instantaneous. It may take several months to a few years for the full effect to be felt. Additionally, higher rates can slow economic growth, reduce hiring, and potentially increase unemployment if demand falls too sharply. Central banks must balance the goal of reducing inflation with the risk of triggering a recession.

Summary

In essence, raising interest rates works to cut inflation by:

• Making borrowing more expensive, reducing spending on big-ticket items and business investments.
• Encouraging saving, which lowers overall consumption.
• Slowing demand, which eases upward pressure on prices and stabilizes inflation expectations.
  This monetary policy tool is a key mechanism for central banks to maintain price stability while managing economic growth.

Mikey has a class project where they have to “invest” 10K in the stock market distributed between 5-10 funds. I thought this was a great exercise as I constantly hear from the kids “we never learn anything that is real world stuff”.

I was so happy to help with the project and put together exactly what would be a nice split between 5 funds that would grow over time if a 16 year old was investing. Then he tells me the class/project ends in a couple months and they just want to make money quick. He had obviously never heard of the funds I helped pick which apparently was “boring”.

Here is one thing I agree with that the kids tell me: they really aren’t teaching anything real world in schools for the most part. Because here is the truth about investing: it’s not a “get rich” quick scenario as they all hope and think….and it is boring!! The boring is what you have to get past. Investing and patience is the key and today’s generation is certainly not patient. They want everything right now.

Maybe once they get older they find the prospect of making money while you sleep “sexy” even if it is boring!

As someone who lived and worked in North Jersey for many years and saw the Manhattan skyline every day, Sept.11th is still fresh in my mind like it was yesterday. I was at a business meeting that morning in Newport, RI with my regional colleagues from North Jersey and NYC. That meeting was supposed to have taken place at the World Trade Center Marriott hotel next to the towers but was moved a month before (we were unknowingly very fortunate it was). As we watched on TV like most, it was still different because people I worked with had spouses, family, and friends working there and were frantically trying to reach them. It was beyond terrible. We all learned later that some were lost and others thankfully made it home safely.

Our meeting was obviously cancelled and we were told we could stay or go…whichever felt best for us. Two of my friends and I drove up together and decided we were heading home. The roads from Rhode Island back to NJ were basically empty except for emergency personnel and law enforcement. We had to take the long way back because all the major bridges were shut down. We listened to the radio reporting in silence the entire way. As we came down into NJ from NY state, the road always gave you a magnificent view of the NYC skyline. This time, all we could focus on was the rising smoke.

The documentaries on TV are amazing (though sometimes hard to watch) but it’s part of our history and the younger generation should learn about it. My wife and I have told our stories to our children about that day. Make sure you pass along your stories as well.