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How Does Raising Interest Rates Lower Inflation?

Between March 2022 and March 2023, the Fed raised the federal funds target rate by 475 basis points or 4.75%. … Read more

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Between March 2022 and March 2023, the Fed raised the federal funds target rate by 475 basis points or 4.75%. This news was widely covered in the media because it wasn’t immediately clear whether the persistent rate hikes were slowing inflation.

If you’re reading this article, there’s a chance inflation is high right now, and you’ve been hearing about the Fed raising interest rates. Many people are confused about the Fed’s monetary policy and how raising interest rates can affect what you pay at the gas pump or supermarket. In this article, we’ll try to clarify the relationship between the two.

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Key Takeaways

  • When consumer demand exceeds supply, the prices of goods and services increase until the Fed can restore a balance. 
  • Higher interest rates tend to discourage spending and encourage saving money, which lowers demand to bring supply and demand back in balance. 
  • The most considerable risk with raising interest rates to lower inflation is that there usually won’t be a soft landing, which can push the economy into a recession. 

What You’ve Likely Heard 

If you’ve seen a news segment on the Fed raising interest rates or heard a relative complain about the high cost of borrowing, you may have preconceptions about what raising interest rates means. 

For example, you may think that rate hikes always cause an economic recession. You may also have heard the Fed wants to raise unemployment to stop inflation. Neither of these paint an entirely accurate picture of the situation. 

The Fed generally raises interest rates when inflation doesn’t naturally resolve itself. While an economic recession is a risk of rate hikes, it’s not a certainty. Let’s go into further detail to understand the Fed’s thought process and how its actions affect inflation. 

Monetary Policy

The Federal Reserve is the central banking system of the US and has the dual mandate of maintaining sustainable growth and maximizing employment. The Fed influences these things through monetary policy, the tools available to the Fed with which they control the nation’s money supply.

The federal funds target rate is one of the Fed’s monetary policy tools.  

The fed funds rate indirectly affects the rate at which banks borrow and lend their excess reserves to each other overnight. Because banks have to meet specific reserve requirements related to the amount of money they keep on hand, a higher fed funds rate disincentivizes borrowing.

The fed funds rate impacts more than just banks. Borrowing becomes more expensive for consumers when the Fed raises rates, encouraging people to save money and decreasing demand. When demand falls, it allows prices to stabilize and curbs inflation. 

But before we go into more detail, we should also understand what causes high inflation in the first place.  

What Causes High Inflation? 

There are many possible reasons why inflation could be on the rise in an economy. Generally speaking, inflation can increase when the cost of raw materials or production increases, demand for products surges past the supply level, or the government’s fiscal policies cause disruptions. Many other factors could exacerbate inflation, from supply chain issues caused by global conflict to unexpected demand levels, as we saw governments lifting pandemic restrictions. 

For a case study of rising inflation and the Fed’s response, let’s consider the build-up to the 475 bps rate hike from 2022 to 2023. 

Initially, inflation was labeled as “transitory” in the spring of 2021 because the Fed believed the unique spike in global demand from loosening pandemic restrictions was causing the price increase. The supply chains couldn’t keep up because they had grown accustomed to a “new normal,” so when consumer demand shifted, there was a delay as supply chains caught up. 

There were also unique global events impacting inflation in 2022. The Russian attack on Ukraine disrupted global supply chains, and many countries introduced sanctions against Russia. The Russian war with Ukraine heavily affected energy prices, as the former held a high market share of European gas. 

This huge mismatch in supply and demand led to increased prices, with inflation reaching 8.3% year-over-year in August 2022.

How Does Raising Rates Lower Inflation?

It may seem counterintuitive to hear the central banks raise interest rates because everything is becoming more expensive. But we can’t stress enough that price stability is the goal of raising rates. 

In the event of high inflation (unsustainable economic growth), the central bank has to decrease the money supply to restore the balance of demand and supply. Said another way, demand has to slow down enough for supply to catch up. 

When borrowing money costs more due to higher rates, consumers are less likely to carry credit card debt or apply for a loan. An auto loan or mortgage is now more expensive. You may not make that home purchase if borrowing costs you more than it would have a year ago. Consumers may think twice before putting a transaction on a high-interest-rate credit card.

The Fed aims to bring demand down enough to match supply, which should control the increasing prices. The challenge is to get the entire economy down to an acceptable level without leading it into a recession. 

Does Raising Interest Rates Always Work for Fighting Inflation?

The obvious question many of us have is whether monetary policy always works. It feels frustrating that the move to fight inflation is to cool off the whole economy. A frequent effect of rising interest rates is higher unemployment, as many companies adjust to reduced revenue and a stop to growth.  

The truth is that the Fed only has so many tools that it can use to control inflation. The Fed can raise rates to fight inflation but can’t introduce fiscal policies or pass laws. 

The government introduces fiscal policies and legislation to support the central banks. Using our 2022-23 case study again, we saw fiscal policy used in August 2022 when President Biden signed the Inflation Reduction Act into law. The government can also broker deals with other countries to increase supply, thereby alleviating issues with the supply of raw materials. 

The Fed is also obviously limited when it comes to influencing global supply chains. Using our case study, the Fed couldn’t single-handedly resolve the conflict in Ukraine, which caused massive disruptions in the world’s grain, gas, and oil supply.

The danger of the Fed not managing inflation is serious. Stagflation, though rare, is a possibility. Stagflation refers to a uniquely dangerous economic situation in which inflation and unemployment are high, and economic demand has stagnated. 

While the Fed will try to bring demand in line with supply, supply chain issues make this restoration difficult. There are no one-size-fits-all solutions for managing supply, as the central bank can’t control global conflict. 

What Are the Consequences of Interest Rates Increasing? 

Many consequences come with raising interest rates; certain people can suffer more than others. 

When borrowing money becomes more expensive, getting a mortgage, applying for an auto loan, or getting a business loan to grow a company becomes costlier. Businesses and consumers will spend less, cooling off the economy. Unfortunately, this can also lead to job loss. Every industry impacted by the rate hikes will likely report lower earnings, leading to layoffs and higher unemployment rates. 

It’s difficult to anticipate the impact of every rate hike on consumer spending. The Fed aims to engineer a soft landing where prices cool down without mass job loss and a full-blown recession. 

How Can You Invest Your Money?

When the Fed announces interest rate hikes, the stock market tends to suffer. It becomes challenging to find the best investment when interest rates are high because uncertainty can lead to stock market sell-offs. 

Companies that are generally considered recession-proof include utility companies, food and beverage vendors, discount retail stores, and healthcare companies. If high interest rates lead to a recession, discretionary spending usually decreases, but not in the essential sectors of the economy. 

Bond Prices and Interest Rates 

When the Fed adjusts the fed funds rate, it affects the bond market. Bonds and interest rates have an inverse relationship. Because most bonds come with a fixed rate when interest rates fall, bonds with now comparatively high rates become more attractive to bond investors. This pushes the price of bonds higher. Conversely, if the Fed raises rates, bonds with relatively low rates become less attractive investments, causing their prices to decrease. 

You may hear about something called an inverted yield curve. This refers to shorter-term bonds having higher yields than longer-term bonds. This is considered an inversion of what should be true: taking a longer-term bond (a bond with greater risk) should earn you a higher yield.

An inverted yield curve suggests investors are not confident about the economy’s future, and experts see it as an indicator of an upcoming recession. 

The Bottom Line

News around high inflation tends to be doom and gloom. Rate hikes can end companies’ growth periods, lead to unemployment, and push the economy into recession. At the same time, out-of-control inflation can lead to even more dangerous economic situations. 

The Fed will fight against inflation by raising interest rates until supply and demand come back into balance. Don’t be surprised to hear about rate hikes in the future, as they’re a common reaction to high inflation. You can prepare yourself financially for the worst-case scenario by saving money and diversifying your income.

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Illegal Immigrants Leave US Hospitals With Billions In Unpaid Bills

Illegal Immigrants Leave US Hospitals With Billions In Unpaid Bills

By Autumn Spredemann of The Epoch Times

Tens of thousands of illegal…

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March 15, 2024

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Illegal Immigrants Leave US Hospitals With Billions In Unpaid Bills

By Autumn Spredemann of The Epoch Times

Tens of thousands of illegal immigrants are flooding into U.S. hospitals for treatment and leaving billions in uncompensated health care costs in their wake.

The House Committee on Homeland Security recently released a report illustrating that from the estimated $451 billion in annual costs stemming from the U.S. border crisis, a significant portion is going to health care for illegal immigrants.

With the majority of the illegal immigrant population lacking any kind of medical insurance, hospitals and government welfare programs such as Medicaid are feeling the weight of these unanticipated costs.

Apprehensions of illegal immigrants at the U.S. border have jumped 48 percent since the record in fiscal year 2021 and nearly tripled since fiscal year 2019, according to Customs and Border Protection data.

Last year broke a new record high for illegal border crossings, surpassing more than 3.2 million apprehensions.

And with that sea of humanity comes the need for health care and, in most cases, the inability to pay for it.

In January, CEO of Denver Health Donna Lynne told reporters that 8,000 illegal immigrants made roughly 20,000 visits to the city’s health system in 2023.

The total bill for uncompensated care costs last year to the system totaled $140 million, said Dane Roper, public information officer for Denver Health. More than $10 million of it was attributed to “care for new immigrants,” he told The Epoch Times.

Though the amount of debt assigned to illegal immigrants is a fraction of the total, uncompensated care costs in the Denver Health system have risen dramatically over the past few years.

The total uncompensated costs in 2020 came to $60 million, Mr. Roper said. In 2022, the number doubled, hitting $120 million.

He also said their city hospitals are treating issues such as “respiratory illnesses, GI [gastro-intenstinal] illnesses, dental disease, and some common chronic illnesses such as asthma and diabetes.”

“The perspective we’ve been trying to emphasize all along is that providing healthcare services for an influx of new immigrants who are unable to pay for their care is adding additional strain to an already significant uncompensated care burden,” Mr. Roper said.

He added this is why a local, state, and federal response to the needs of the new illegal immigrant population is “so important.”

Colorado is far from the only state struggling with a trail of unpaid hospital bills.

EMS medics with the Houston Fire Department transport a Mexican woman the hospital in Houston on Aug. 12, 2020. (John Moore/Getty Images)

Dr. Robert Trenschel, CEO of the Yuma Regional Medical Center situated on the Arizona–Mexico border, said on average, illegal immigrants cost up to three times more in human resources to resolve their cases and provide a safe discharge.

“Some [illegal] migrants come with minor ailments, but many of them come in with significant disease,” Dr. Trenschel said during a congressional hearing last year.

“We’ve had migrant patients on dialysis, cardiac catheterization, and in need of heart surgery. Many are very sick.”

He said many illegal immigrants who enter the country and need medical assistance end up staying in the ICU ward for 60 days or more.

A large portion of the patients are pregnant women who’ve had little to no prenatal treatment. This has resulted in an increase in babies being born that require neonatal care for 30 days or longer.

Dr. Trenschel told The Epoch Times last year that illegal immigrants were overrunning healthcare services in his town, leaving the hospital with $26 million in unpaid medical bills in just 12 months.

ER Duty to Care

The Emergency Medical Treatment and Labor Act of 1986 requires that public hospitals participating in Medicare “must medically screen all persons seeking emergency care … regardless of payment method or insurance status.”

The numbers are difficult to gauge as the policy position of the Centers for Medicare & Medicaid Services (CMS) is that it “will not require hospital staff to ask patients directly about their citizenship or immigration status.”

In southern California, again close to the border with Mexico, some hospitals are struggling with an influx of illegal immigrants.

American patients are enduring longer wait times for doctor appointments due to a nursing shortage in the state, two health care professionals told The Epoch Times in January.

A health care worker at a hospital in Southern California, who asked not to be named for fear of losing her job, told The Epoch Times that “the entire health care system is just being bombarded” by a steady stream of illegal immigrants.

“Our healthcare system is so overwhelmed, and then add on top of that tuberculosis, COVID-19, and other diseases from all over the world,” she said.

A Salvadorian man is aided by medical workers after cutting his leg while trying to jump on a truck in Matias Romero, Mexico, on Nov. 2, 2018. (Spencer Platt/Getty Images)

A newly-enacted law in California provides free healthcare for all illegal immigrants residing in the state. The law could cost taxpayers between $3 billion and $6 billion per year, according to recent estimates by state and federal lawmakers.

In New York, where the illegal immigration crisis has manifested most notably beyond the southern border, city and state officials have long been accommodating of illegal immigrants’ healthcare costs.

Since June 2014, when then-mayor Bill de Blasio set up The Task Force on Immigrant Health Care Access, New York City has worked to expand avenues for illegal immigrants to get free health care.

“New York City has a moral duty to ensure that all its residents have meaningful access to needed health care, regardless of their immigration status or ability to pay,” Mr. de Blasio stated in a 2015 report.

The report notes that in 2013, nearly 64 percent of illegal immigrants were uninsured. Since then, tens of thousands of illegal immigrants have settled in the city.

“The uninsured rate for undocumented immigrants is more than three times that of other noncitizens in New York City (20 percent) and more than six times greater than the uninsured rate for the rest of the city (10 percent),” the report states.

The report states that because healthcare providers don’t ask patients about documentation status, the task force lacks “data specific to undocumented patients.”

Some health care providers say a big part of the issue is that without a clear path to insurance or payment for non-emergency services, illegal immigrants are going to the hospital due to a lack of options.

“It’s insane, and it has been for years at this point,” Dana, a Texas emergency room nurse who asked to have her full name omitted, told The Epoch Times.

Working for a major hospital system in the greater Houston area, Dana has seen “a zillion” migrants pass through under her watch with “no end in sight.” She said many who are illegal immigrants arrive with treatable illnesses that require simple antibiotics. “Not a lot of GPs [general practitioners] will see you if you can’t pay and don’t have insurance.”

She said the “undocumented crowd” tends to arrive with a lot of the same conditions. Many find their way to Houston not long after crossing the southern border. Some of the common health issues Dana encounters include dehydration, unhealed fractures, respiratory illnesses, stomach ailments, and pregnancy-related concerns.

“This isn’t a new problem, it’s just worse now,” Dana said.

Emergency room nurses and EMTs tend to patients in hallways at the Houston Methodist The Woodlands Hospital in Houston on Aug. 18, 2021. (Brandon Bell/Getty Images)

Medicaid Factor

One of the main government healthcare resources illegal immigrants use is Medicaid.

All those who don’t qualify for regular Medicaid are eligible for Emergency Medicaid, regardless of immigration status. By doing this, the program helps pay for the cost of uncompensated care bills at qualifying hospitals.

However, some loopholes allow access to the regular Medicaid benefits. “Qualified noncitizens” who haven’t been granted legal status within five years still qualify if they’re listed as a refugee, an asylum seeker, or a Cuban or Haitian national.

Yet the lion’s share of Medicaid usage by illegal immigrants still comes through state-level benefits and emergency medical treatment.

A Congressional report highlighted data from the CMS, which showed total Medicaid costs for “emergency services for undocumented aliens” in fiscal year 2021 surpassed $7 billion, and totaled more than $5 billion in fiscal 2022.

Both years represent a significant spike from the $3 billion in fiscal 2020.

An employee working with Medicaid who asked to be referred to only as Jennifer out of concern for her job, told The Epoch Times that at a state level, it’s easy for an illegal immigrant to access the program benefits.

Jennifer said that when exceptions are sent from states to CMS for approval, “denial is actually super rare. It’s usually always approved.”

She also said it comes as no surprise that many of the states with the highest amount of Medicaid spending are sanctuary states, which tend to have policies and laws that shield illegal immigrants from federal immigration authorities.

Moreover, Jennifer said there are ways for states to get around CMS guidelines. “It’s not easy, but it can and has been done.”

The first generation of illegal immigrants who arrive to the United States tend to be healthy enough to pass any pre-screenings, but Jennifer has observed that the subsequent generations tend to be sicker and require more access to care. If a family is illegally present, they tend to use Emergency Medicaid or nothing at all.

The Epoch Times asked Medicaid Services to provide the most recent data for the total uncompensated care that hospitals have reported. The agency didn’t respond.

Continue reading over at The Epoch Times

Tyler Durden Fri, 03/15/2024 - 09:45

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International

Fuel poverty in England is probably 2.5 times higher than government statistics show

The top 40% most energy efficient homes aren’t counted as being in fuel poverty, no matter what their bills or income are.

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March 15, 2024

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Julian Hochgesang|Unsplash

The cap set on how much UK energy suppliers can charge for domestic gas and electricity is set to fall by 15% from April 1 2024. Despite this, prices remain shockingly high. The average household energy bill in 2023 was £2,592 a year, dwarfing the pre-pandemic average of £1,308 in 2019.

The term “fuel poverty” refers to a household’s ability to afford the energy required to maintain adequate warmth and the use of other essential appliances. Quite how it is measured varies from country to country. In England, the government uses what is known as the low income low energy efficiency (Lilee) indicator.

Since energy costs started rising sharply in 2021, UK households’ spending powers have plummeted. It would be reasonable to assume that these increasingly hostile economic conditions have caused fuel poverty rates to rise.

However, according to the Lilee fuel poverty metric, in England there have only been modest changes in fuel poverty incidence year on year. In fact, government statistics show a slight decrease in the nationwide rate, from 13.2% in 2020 to 13.0% in 2023.

Our recent study suggests that these figures are incorrect. We estimate the rate of fuel poverty in England to be around 2.5 times higher than what the government’s statistics show, because the criteria underpinning the Lilee estimation process leaves out a large number of financially vulnerable households which, in reality, are unable to afford and maintain adequate warmth.

Blocks of flats in London.
Household fuel poverty in England is calculated on the basis of the energy efficiency of the home. Igor Sporynin|Unsplash

Energy security

In 2022, we undertook an in-depth analysis of Lilee fuel poverty in Greater London. First, we combined fuel poverty, housing and employment data to provide an estimate of vulnerable homes which are omitted from Lilee statistics.

We also surveyed 2,886 residents of Greater London about their experiences of fuel poverty during the winter of 2022. We wanted to gauge energy security, which refers to a type of self-reported fuel poverty. Both parts of the study aimed to demonstrate the potential flaws of the Lilee definition.

Introduced in 2019, the Lilee metric considers a household to be “fuel poor” if it meets two criteria. First, after accounting for energy expenses, its income must fall below the poverty line (which is 60% of median income).

Second, the property must have an energy performance certificate (EPC) rating of D–G (the lowest four ratings). The government’s apparent logic for the Lilee metric is to quicken the net-zero transition of the housing sector.

In Sustainable Warmth, the policy paper that defined the Lilee approach, the government says that EPC A–C-rated homes “will not significantly benefit from energy-efficiency measures”. Hence, the focus on fuel poverty in D–G-rated properties.

Generally speaking, EPC A–C-rated homes (those with the highest three ratings) are considered energy efficient, while D–G-rated homes are deemed inefficient. The problem with how Lilee fuel poverty is measured is that the process assumes that EPC A–C-rated homes are too “energy efficient” to be considered fuel poor: the main focus of the fuel poverty assessment is a characteristic of the property, not the occupant’s financial situation.

In other words, by this metric, anyone living in an energy-efficient home cannot be considered to be in fuel poverty, no matter their financial situation. There is an obvious flaw here.

Around 40% of homes in England have an EPC rating of A–C. According to the Lilee definition, none of these homes can or ever will be classed as fuel poor. Even though energy prices are going through the roof, a single-parent household with dependent children whose only income is universal credit (or some other form of benefits) will still not be considered to be living in fuel poverty if their home is rated A-C.

The lack of protection afforded to these households against an extremely volatile energy market is highly concerning.

In our study, we estimate that 4.4% of London’s homes are rated A-C and also financially vulnerable. That is around 171,091 households, which are currently omitted by the Lilee metric but remain highly likely to be unable to afford adequate energy.

In most other European nations, what is known as the 10% indicator is used to gauge fuel poverty. This metric, which was also used in England from the 1990s until the mid 2010s, considers a home to be fuel poor if more than 10% of income is spent on energy. Here, the main focus of the fuel poverty assessment is the occupant’s financial situation, not the property.

Were such alternative fuel poverty metrics to be employed, a significant portion of those 171,091 households in London would almost certainly qualify as fuel poor.

This is confirmed by the findings of our survey. Our data shows that 28.2% of the 2,886 people who responded were “energy insecure”. This includes being unable to afford energy, making involuntary spending trade-offs between food and energy, and falling behind on energy payments.

Worryingly, we found that the rate of energy insecurity in the survey sample is around 2.5 times higher than the official rate of fuel poverty in London (11.5%), as assessed according to the Lilee metric.

It is likely that this figure can be extrapolated for the rest of England. If anything, energy insecurity may be even higher in other regions, given that Londoners tend to have higher-than-average household income.

The UK government is wrongly omitting hundreds of thousands of English households from fuel poverty statistics. Without a more accurate measure, vulnerable households will continue to be overlooked and not get the assistance they desperately need to stay warm.

Torran Semple receives funding from Engineering and Physical Sciences Research Council (EPSRC) grant EP/S023305/1.

John Harvey does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.

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Looking Back At COVID’s Authoritarian Regimes

After having moved from Canada to the United States, partly to be wealthier and partly to be freer (those two are connected, by the way), I was shocked,…

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March 15, 2024

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After having moved from Canada to the United States, partly to be wealthier and partly to be freer (those two are connected, by the way), I was shocked, in March 2020, when President Trump and most US governors imposed heavy restrictions on people’s freedom. The purpose, said Trump and his COVID-19 advisers, was to “flatten the curve”: shut down people’s mobility for two weeks so that hospitals could catch up with the expected demand from COVID patients. In her book Silent Invasion, Dr. Deborah Birx, the coordinator of the White House Coronavirus Task Force, admitted that she was scrambling during those two weeks to come up with a reason to extend the lockdowns for much longer. As she put it, “I didn’t have the numbers in front of me yet to make the case for extending it longer, but I had two weeks to get them.” In short, she chose the goal and then tried to find the data to justify the goal. This, by the way, was from someone who, along with her task force colleague Dr. Anthony Fauci, kept talking about the importance of the scientific method. By the end of April 2020, the term “flatten the curve” had all but disappeared from public discussion.

Now that we are four years past that awful time, it makes sense to look back and see whether those heavy restrictions on the lives of people of all ages made sense. I’ll save you the suspense. They didn’t. The damage to the economy was huge. Remember that “the economy” is not a term used to describe a big machine; it’s a shorthand for the trillions of interactions among hundreds of millions of people. The lockdowns and the subsequent federal spending ballooned the budget deficit and consequent federal debt. The effect on children’s learning, not just in school but outside of school, was huge. These effects will be with us for a long time. It’s not as if there wasn’t another way to go. The people who came up with the idea of lockdowns did so on the basis of abstract models that had not been tested. They ignored a model of human behavior, which I’ll call Hayekian, that is tested every day.

These are the opening two paragraphs of my latest Defining Ideas article, “Looking Back at COVID’s Authoritarian Regimes,” Defining Ideas, March 14, 2024.

Another excerpt:

That wasn’t the only uncertainty. My daughter Karen lived in San Francisco and made her living teaching Pilates. San Francisco mayor London Breed shut down all the gyms, and so there went my daughter’s business. (The good news was that she quickly got online and shifted many of her clients to virtual Pilates. But that’s another story.) We tried to see her every six weeks or so, whether that meant our driving up to San Fran or her driving down to Monterey. But were we allowed to drive to see her? In that first month and a half, we simply didn’t know.

Read the whole thing, which is longer than usual.

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