College of Liberal Arts Speaks with Dennis Jansen on Inflation, Interest Rates
May 05, 2022
Summary: Dennis Jansen spoke about inflation and interest rate changes in an interview with the Texas A&M College of Liberal Arts that was published on Wednesday, May 4, 2022.
Dennis Jansen spoke about inflation and interest rate changes in an interview with the Texas A&M College of Liberal Arts that was published on Wednesday, May 4, 2022.
On March 16, the Federal Reserve raised interest rates one quarter of a point to counter rising inflation. Jansen explained, “What we’re seeing is the [Federal Reserve] responding to the very high inflation rates by gradually increasing the interest rate on reserves in small increments but planning on doing so for the foreseeable future. The interest rate on reserves could be several percent by the end of the year.”
National interest rates are currently soaring at highs not seen since the 1980s.“The interest rate on treasury bonds has gone up and it’s enticing banks to try to reduce their holdings of reserves and instead hold more treasury bonds because they pay higher interest rates,” Jansen explained. “The more that banks engage in this activity of trying to reduce their holding of reserves and instead use those reserves to buy treasury bonds, the money supply will grow and perhaps make it harder for the [Federal Reserve] to slow down the inflation rate. The [Federal Reserve] is raising the interest rate on reserves to counteract this very large rise in inflation we’ve been experiencing.”
Despite rising wages, high inflation means higher consumer prices and less purchasing power. “The inflation rates are also affecting students. It’s affecting rent and wages. The rise in prices is increasing faster than the rise in wages, so in terms of purchasing power, wages are going up too slowly. People are getting raises, but those raises are purchasing fewer goods and services so it’s like you’re getting a pay cut.”
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