Stuff You Should Know - The Scintillating World of Interest Rates

Episode Date: May 31, 2022

When the Fed raises interest rates a half point, the world market reacts. But why does this tiny percentage make such a difference? Listen and learn!See omnystudio.com/listener for privacy information.

Hey, I'm Lance Bass, host of the new iHeart podcast Frosted Tips with Lance Bass. Do you ever think to yourself, what advice would Lance Bass and my favorite boy bands give me in this situation? If you do, you've come to the right place because I'm here to help. And a different hot sexy teen crush boy bander each week to guide you through life. Tell everybody, yeah, everybody about my new podcast and make sure to listen so we'll never, ever have to say bye, bye, bye. Listen to Frosted Tips with Lance Bass on the iHeart radio app, Apple podcast, or wherever you listen to podcasts. I'm Munga Chauticular and it turns out astrology is way more widespread than any of us want to

believe. You can find in Major League Baseball, International Banks, K-pop groups, even the White House. But just when I thought I had a handle on this subject, something completely unbelievable happened to me and my whole view on astrology changed. Whether you're a skeptic or a believer, give me a few minutes because I think your ideas are about to change too. Listen to Skyline Drive on the iHeart radio app, Apple podcast, or wherever you get your podcasts. Welcome to Stuff You Should Know, a production of iHeart Radio. Hey and welcome to the podcast. I'm Josh Clark and there's Charles W. Chuck Bryant seated directly across from me. Within Almost Arms Reach is Jerry Rowland seated to my right and I'm seated right

here at my axis in the center of my own being and this is Stuff You Should Know. Yeah, in person a dish, first time since the 1980. The one-time 3D audio experience experiment. Oh boy, I forgot about that. I marked it out of my head. That's the only time we've been in the same room to record since COVID was that. Is that right? Those two episodes, I don't remember the second one. I remember the first one. It was the Ivy League. The Harvard thing. Yeah, because Ivy League and 3D audio are just like such low hanging fruit.

Yeah, but we're back because I put it on my Instagram. The studio is going away. We're moving house and surprisingly, to me at least, you said, hey guys, I'd really like to record in there together one more time. Why is that so surprising? I don't know. You don't seem overly sentimental about stuff like this. That's not true. I weep a lot. Yeah, but not about studio rooms. No, I mean, I'll miss this particular room.

Okay, me too. I mean, I think like seven of the most solid years we've ever had been in right here. Pretty solid, although the corner office with moving blankets says sound bafflers was a pretty solid couple years too. The quaint early days. I drove by that building the other day too and for the first time in forever. Yeah. And Buckhead and I was just like, ugh. Do you remember there was like, for some reason, every time we recorded at like 1.30 when we had just started to get going, a fire truck would go right outside.

Every day. At the same time. It's like they knew. Oh, the memories. So that's enough fun for now, Chuck, because we're talking about interest rates, all right? I don't know why I picked this. I mean, I do know why, but I'm so not good at this stuff. So I can imagine an AP economics like teacher picking this for their high school class. So I think that's kind of like a public service you've done here.

Well, I picked it because, you know, the Fed just raised the rate by half of a point, right? Yeah. Biggest hike since 19, no, 2000. Yeah. So I saw that biggest hike and I was like, oh my gosh, what was it, 20, 30? It was a half a point and I was like, I don't understand this. So I might as well learn it enough to tell other people a little bit about it. Do you understand now? Yeah. It's like that half of a percent is actually a pretty big deal.

It is, and I understand now more than ever, there's like nine people that just control the economy of the United States. Right, exactly. Yeah, it's true. Yeah, that half of a percentage point, as you'll see by the time we're done with this, everybody, is basically the Fed going, eesh. Yeah. They're really kind of nervous right now. Sure.

And what they're going for by raising that interest rate is to cool off the economy. We have inflation rates that haven't been seen since 1981, not a good time for inflation. And I mean, we're talking, the Great Recession was in there too, right? Yeah. Like this is a big deal, the inflation that we're seeing right now. So the Fed is saying, okay, we have an economy that is overheating. Like you want some inflation as we'll see, but this is way too much inflation. The prices of like everything is going through the roof.

People are getting really mad. We better do something about it. But what they're trying to do by raising the interest rates is to create a soft landing so that prices come down, but they don't affect productivity and employment. That's the big thing. And Ben Bernanke put it once back when he was still just a Fed governor rather than the chair. He said basically that what they were doing was like driving a car.

I'm paraphrasing here. He's going to scare everybody. He didn't put it very well. Yes, probably. He said basically what the Fed does is like driving a car with fogged up windshield. Okay. A faulty speedometer. No good.

And a brake pedal and accelerator that when you press it, the car has a very significant delay before it responds. Oh, I thought you were going to say a brake and an accelerator that just switch positions without letting you know, which is which. And it's on fire and there's monkeys everywhere and they're angry. Yeah, the delay, sure, because none of these, you know, none of these moves, it's an immediate impact. And it's sort of a fingers crossed behind your back kind of move.

Yeah. Almost always. Yeah. And so most people who are watching this are saying the Fed waited too long because they kept the economy juiced for years and years and years. It just kept getting hotter and hotter and everybody was very happy until prices started going up. Right. So they waited too long.

So most, I shouldn't say most, a lot of people who know what they're talking about say, there's a recession coming pretty soon. So batten down the hatches. Right. Key indicators, as they say. Right. So what does all this have to do with interest rates, Chuck? Let's wrap. Well, I mean, this is, we'll get to the Fed, but this is generally about interest rates.

The good news is everything else about interest rates is pretty basic. We are a nation and in a lot of ways a world that operates on loans and interest in borrowing money and then banks borrow money from each other and then the Fed lends money to banks. And it's just, it's a weird thing. It's a weird world economy that has been created over the past several hundred years in this country. There's a lot of shiny suits. People will break your arms.

Yeah. That's basically what it's all based on. Sure, but it's all based on the fact that if you want to buy something as a person, and you know, we're focusing on the United States here, and you don't have the money, it's no big deal because you can get credit cards if you want to pay large interest rates, you can get a home loan or a car loan because not everyone can shell out, you know, 20 to 50 grand for a car or however much houses cost now, eight million dollars. And you know, there's risk involved.

Anytime you lend money and depending, all of it really comes down to the risk of the loan as according to what the interest rate is going to end up being. Right. So what we're talking about now are interest rates on the micro level, like the you and me level, like you're saying house buying, car buying, credit cards, all that stuff. And it is, it's really basic, like you were saying, where with interest rates, if you go to get a loan, say, they're going to look at a few things. Like what are you going to buy?

I'm going to buy a really cool vintage poison t-shirt on eBay. Okay. Okay. It's like 15 grand. Easily. I want to borrow some money to get that t-shirt. That's right. So they're going to look at my, whoever I borrow from is going to look at my credit score,

especially if it's an unsecured debt, right? Yeah, unsecured debt is basically any kind of credit card debt because they can't come and take away anything basically. They're not going to take my poison shirt if I default on the loan. They should. The way that they get you is they affect your credit. Right. But I still get to keep the poison shirt.

So who's the sucker here? Right, as opposed to a secured debt, which is you got like a home mortgage because they can come and take that. Right. So getting back to interest rates then, that would mean that since the bank that lent you the money to buy your home can legally seize your home because it's a secured debt. Yeah, it's collateral. They're going to charge you less because at the end of the day, if you default,

they can take your house. The credit card is going to charge you a higher interest rate because at the end of the day, if you default, they can't take that poison shirt. So they're going to charge more and the reason that there's a difference in charging more or less is because the entire point of interest is that's the price you're paying for somebody to loan you money in exchange for them taking a risk because there's always a risk that you're going to not pay it back. Even if you have great credit, something could happen.

You could break bad or something like that. Who knows? But there's always a risk and that's what interest is. It's the money they make for loaning you that money and taking that risk. That's right. And it's a little, it's not counterintuitive, but it kind of works both ways because if you have the collateral of let's say a home mortgage and they can take that house, that's going to be a much lower interest rate like you said than the credit card.

But it's also going to be higher in some ways because it's a long-term loan. It's kind of a negative outlook, but I think that banks look at people and say, well, if you have a 30-year home mortgage, I don't know what you're going to be doing in 27 years. You may be broke, you may be destitute, you may be in the hospital and have no money anymore. So that's going to be a little higher, which is why if you can, like people always, I mean financial people, I'm not one of those, but they always recommend you like refi your house and bring it down to a 15-year loan because it's less risky. And it'll be a little bit less of an annual percentage rate.

Right. And then one of the other reasons, if you've ever looked at a house or gotten a mortgage, there's a big difference between the rate you're charged for a 15-year and a 30-year. Not just because there's a longer chance for you to default on the loan, but also because over the course of 30 years, inflation is going to actually eat into the amount of money you pay that bank back because it's going to depress the value of the dollar over time. Right. So when that bank is getting what's left on your 100 grand 25 years from now, it's not going to be the same as the value of that dollar now. Right. So there's actually two types of interest that you pay on, say, like a 30-year mortgage,

or even a 15-year mortgage. And that is the nominal rate, which is the rate you agree to, say 10%, which is astronomical. Don't ever take a home loan out with a 10% mortgage interest on it. Right. That's just a tip from me. But over time, as inflation grows, let's say over that 15 years, inflation grows a total of like 4%. You're actually paying the bank back, or they're actually getting back the value equal to about 6% of what they lent you. And what's that called? That is the real interest rate, right? That's right. Okay, I remember. Wake up, everybody, by the way. All right. And by the way, Jerry's eating over there, and there's just nothing more normal

and relaxing than us sitting in a room and Jerry chomping down next to us. I just want to acknowledge that. It's kind of nice. It is nice. She's not eating me so, though, this time. It's the only thing missing from this. You know, most people fall asleep to like white noise or the sound of the ocean. I have one of just Jerry chewing. That's me right to bed. All right, so I guess that's like just the basic overview of how regular interest rates work. It's really easy. It's very basic. Yeah, it's the price you pay to borrow money rather than saving up to spend later. Yeah, but no one cares about that stuff because you try and get your credit card rates down. You try and have good credit, and you buy a house. You try and get the

best rate you can, and then it's all kind of said and done. But what everyone sits up and takes attention is when the Federal Reserve, and by the way, if you ever want to just send me into traffic, we should just do a whole podcast on the Fed. I don't understand why they talk the way they do. I know. Like they're purposefully obtuse, I think. Like it's really hard. Like you can just read. They're gaming the whole system, so they just want everyone to be even nice and sleepy. I guess so. What they're talking. It's just nuts, man. So when the chairperson of the Federal Reserve sits up and says, all right, we think we're going to raise some interest rates, and by the way, banks, they try to know before they even make that announcement because they're always watching

the chairperson of the Fed. Right. Like, well, they have a breakfast this morning. Right. How are they feeling today? Yeah. Then that's why the recent 0.5% adjustment was just such a big deal because it can have a really immediate and long-term effect, which is kind of weird because immediately, like stocks are going to do all kinds of crazy things, and then it's got this long-term effect that they hope is going to work out, but it doesn't always because it's not an exact science. Yeah. Really good example that goes back to bank mortgages, right? So banks, I'm sure they carry out their own research as well to predict what's going to happen in the future because they want to set their mortgage rates, their 30-year

mortgage rates today with as close a forecast of what's going to happen with inflation over the next 30 years as they possibly can because they want to squeeze out every real penny that they can from you from your loan, right? That's like crystal ball stuff, though, you know? It is, but I mean, I think they've gotten kind of good at it, but it's still at the end of the day just an educated guess. One of the things they do is watch what the Fed's doing. It's the Fed raising interest rates. Are they raising interest rates? Does that mean that they think inflation is going up? If inflation is going up, then we need to adjust our mortgage loans, right? That's pretty simple, but it just keeps going from there. So if mortgage rates increase, home-buying slows,

housing prices drop, that means new houses are being built less frequently, which means there's fewer carpenters being put to work. That means there's fewer lumber mills creating lumber for those houses. So those people are out of work. Those people are out of work. They're starting to default on their rent or their mortgages, and foreclosures start to go up, which further depresses the housing value or the housing market because a flood of houses start to come on the market because of foreclosures, because banks want to offload them. Just from the Fed saying, we might increase by a quarter of a percent our interest rate. That's what's at stake when they're speaking out in public or even making moves without speaking at all.

Yeah. It's pretty scary and precarious. The Fed itself, and like I said, maybe we'll do, I guess we have to at some point on the Fed, but just as a broad overview of the Federal Reserve is the Central Bank of the U.S., there are 12 regional Federal Reserve banks and a seven-member board. I talked about, I don't know if I said seven people, but a seven-member board of governors in D.C., and it was created in 1913 to ideally stabilize and secure our economy because at the time it was sort of the Wild West when it comes to banking. Yeah, there were a lot of bank panics, actually, where people would make a run on a bank, and the bank would be like, we don't have any more money, and they would go under and people would lose their entire savings.

Yeah. It was a pretty brilliant creation. One of the things, the Fed does a lot, but one of the things the Federal Reserve does is it has a lot of cash, and it helps supply the banks that you and I bank at with cash reserves. Maybe let's take a break. That's a good cliffhanger, and we'll talk about the fact that banks, by law, have to keep certain amounts of money, and it gets even more boring. I can't believe this cliffhanger. turn to when questions arise or times get tough, or you're at the end of the road. Do you ever think to yourself, what advice would Lance Bass and my favorite boy bands give me in this situation? If you do, you've come to the right place because I'm here to help.

This, I promise you. Oh, god. Seriously, I swear. And you won't have to send an SOS because I'll be there for you. Oh, man. And so will my husband, Michael. Um, hey, that's me. Yep, we know that, Michael, and a different hot, sexy teen crush boy band are each week to guide you through life step by step. Oh, not another one. Kids, relationships, life in general can get messy. You may be thinking, this is the story of my life. Just stop now. If so, tell everybody, yeah, everybody about my new podcast and make sure to listen so we'll never ever have to say bye, bye, bye, bye. Listen to Frosted Tips with Lance Bass on the iHeart radio app, Apple podcast, or wherever you listen to podcasts. I'm Mangesh Atikular, and to be honest,

I don't believe in astrology. But from the moment I was born, it's been a part of my life. In India, it's like smoking. You might not smoke, but you're going to get secondhand astrology. And lately, I've been wondering if the universe has been trying to tell me to stop running and pay attention. Because maybe there is magic in the stars, if you're willing to look for it. So I rounded up some friends and we dove in and let me tell you, it got weird fast. Tantric curses, Major League Baseball teams, canceled marriages, K-pop. But just when I thought I had to handle on this sweet and curious show about astrology, my whole world came crashing down. Situation doesn't look good. There is risk to father. And my whole view on astrology,

it changed. Whether you're a skeptic or a believer, I think your ideas are going to change too. Listen to Skyline Drive and the iHeart radio app, Apple podcast, or wherever you get your podcasts. Okay, Chuck, before we get into the reserve requirements of banks, I have a pretty neat little story, actually. We were talking about banking panics. And there was one back in 1882, or at least there was one bank that went under. And they had a branch in Sacramento that a guy named Louis Remy, I'm going to say, went to go get his $12,000 that he'd saved up. It was about like $350,000 in today's money. It was like his nest egg, right? He went to go get it out and was told that the bank had failed and they didn't have his money. So you know what Louis

or Louis Remy did? He got on a horse and he rode from Sacramento to Portland, Oregon, 665 miles in six days. Okay. He rode for 143 hours. 10 of those was to stop to sleep. All of those going to say to get a new horse. He had to do that in an instant, right? So for six days, he slept 10 hours to ride to Portland, got there before the steamership that was carrying news of the bank collapse in Sacramento. So he was racing the steamer, got there an hour or two before the steamer, got his $12,000 out of the Portland branch of the bank and within an hour or two of that bank collapsing, finding out that there was no more bank anymore. Wow. Isn't that amazing? I'm glad his flux capacitor was working. Basically, that's basically what he did, but

the horse version of that. Man, yeah, he said, oh, I should give myself an hour. That should be plenty of time. I never understand that in Tom Dravel movies. I don't either. It's like, go back the week before. Take your time. Just take it easy. Maybe get like a snack. You have time. All right. So we promise the scintillating details of the fact that banks have to keep a certain amount of money in their reserves. And that is because, you know, if every, I mean, it's not the 1800s, not everyone's going to say, oh, I got to go to that Chase bank and withdraw every penny all at the same time. But they got to be protected against that. Oh, it could happen though. Yeah, sure. The problem is once a panic starts, it spreads like wildfire. Because that means,

well, if these people are panicking, even though I'm not panicking, I better go to the bank anyway to get my money out before it collapses, before more of these idiots panic and take their money out. Right. So whether you're panicked or not, it actually makes sense if there's a panic in a run going on in your bank to go withdraw. And it's just this chain reaction that starts. So the Fed protects against that by requiring that these banks have these reserves, right? Yes. So it's known as the reserve requirement. It's based on a percentage of all the deposits in that bank. It's very simple calculation. And then they, they, these banks have to have non-interest bearing accounts at the Federal Reserve to make sure the Federal Reserve can cover

everything. Right. To make sure that it's like, okay, you have to have this much. We're going to hang on to it for you. That's right. So they're taking this average every day, but it's over, it's an average over two weeks basically to determine whether or not it's meeting that reserve requirement. And here's the thing that, I don't know, I guess it sort of surprised me, is banks, depending on what's going on on a day-to-day basis, are borrowing and lending money to each other to cover themselves. Yes. So that sounds frightening, but it makes sense. So they've got like a pile of money and whatever money they have, they can make more money if they lend that money out, if they put it to work, right? Yeah. I mean, that's what they want to do,

is to get more interest. So if on one day they're like, oh, we've lent out more than we, we have in reserve, we go to another bank that has an excess and borrow it from them. And then we put it in our Fed account and everything's fine. We're within the legal limits for those reserve requirements. Right. But if they run out of, you know, banks to trade with basically at the end of the day, then they can go to the Fed and say, big mama, we need a little money from you, actually. Right. And the Fed doesn't like that. So they actually charge banks more for the, for to borrow money directly from the Fed for overnight requirements. That's right. But it's ironically called the discount rate, even though it's the larger of the two rates. The other rate where a bank

borrows from another bank overnight to satisfy the Fed's reserve requirements, that's called the federal funds rate. Right. I entered my own funds rate. I thought you're waiting on me. And within that discount rate, there are a few different tiers, kind of just like you would scale or a tier any loan, you've got your primary rate, which is the lowest one. And that's, you know, if you're a great, if you're a great bank and good standing, you're going to get that rate. You got the secondary rate. And that's a few, I think this is by the way, is Dave Ruz, but from House of Works.com. And Dave said, slightly less sound institutions. Right. Galloping Gulch state bank. Yeah, probably. And then you've got your seasonal rate. And these are very small banks that are

based sort of around seasonal economies like tourism or agriculture or something like that. Yeah. Because like when it comes time to bring in the crops for harvest, all the farmers come and say, I need some money to get this stuff to market. I need loans and those banks get strained at those times. Yeah. Or there's lots of great, I feel, old timey heist movies where someone will, you know, like during crop season, they'll know a bank will have just be flooded with cash on a certain afternoon. Yeah. There's a movie you're talking about. I think Raising Arizona. That was definitely the case. Okay. Was that it? But it's been in other movies too. With Emilio Estevez. Was that a bank robber? He was like a robin hood where he,

I think he robbed banks to get rid of the deeds so that the farmers couldn't have their farms foreclosed. I never saw that. I know the movie you're talking about though. I saw it. Wisdom. I saw it. Hey, while we're talking about movies, I've been meaning to give a shout out to, so our friend Toby, his production company made a movie called The Green Knight that slipped under the radar. Not for me, buddy. That's on the theater. Wasn't that an amazing movie? It is. And one of the most like, just sort of like in a day and time where everything is a Marvel movie or something. To have something so original based on like an ancient tale. Yeah. It was great. It was. So David Lowry is the director. Yeah. And he is just a straight up auteur. Yeah. He's just making the

movies that he wants to make. And their production company's called Sailor Bear, I think. I'm so mad that that got snubbed at the Oscars. It's crazy. It's a really good movie. It's like cinematography and set design and costumes like it got nothing. It's crazy. It's wonderful. Yeah. And I think A24 picked it up. Yeah. Which means they're streak of like. Amazing movies. Yes. Flawless. It's a flawless streak. They haven't stumbled once in the entire. I think you're right. The entire history of A24. Yeah. Come at me if you got a bad A24 movie. Let's hear it. You know what I hear? Crickets. Is there a movie called Crickets? Maybe. Okay. There's a movie out there called Egg from the 60s. Really? Yeah. I haven't seen it

though. I just read about it in Uncle John's bathroom reader. I thought you're talking about the movie head, the monkeys movie. Yeah. The monkeys, right? Where they tried to do the whole smile thing. Oh, really? I think so. It was kind of their answer to the Beach Boys smile. Interesting. All right. Can we just keep talking about that stuff? Sure. All right. Here we go. Let's get back on this. The Fed funds rate. Is that what you're talking about? Yeah. We're talking about that's the rate that banks charge one another to borrow overnight to satisfy the reserve. Right. And this is the one that is just very simple supply and demand. If there are, if there's a lot of cash and a lot of banks, then the rate is going to be lower. If there's

demand for more money, then it's going to be higher. The Fed controls all of this. In a roundabout way. Yeah. I mean, they kind of control all of it in a roundabout way. In like almost like a Rube Goldberg mousetrap kind of way. Like it'd be so much easier if they were like, this is what you guys can charge one another as an interest rate. Yeah. But they don't do that. They let the market decide it. They set a target and then let the market work and then they manipulate the market. That's right. So if the Fed wants to lower that funds rate, it's going to buy securities from those banks. There's going to be more cash on hand all of a sudden. If they want to raise the funds rate, they're going to sell government

securities, which are, I mean, anytime you start talking debt instruments, I just go a little crazy with excitement, but government securities are just debt instruments. They're used to fund government operations. It's basically so like the way I understood it was if, like a lot of it is military spending and operations and it just keeps them from having to like raise and lower taxes a lot because they want to keep taxes kind of stable. Right. So yeah. So with all that deficit spending, what they're doing is if the government could operate just on the taxes, tax revenue it brings in, it would be neutral. It wouldn't be operating at a deficit. There wouldn't be any profit. It'd be great, but it spends more money

than it takes in. So it has to issue that debt, which is basically loans in the form of treasury bills. And that's what the Fed is doing when they're out there buying or selling treasury bills, these debt securities. They're taking debt in or out of the market. They're adding cash into or out of the market. And it's not like banks who trade with, it's just a very select elite group of what are called primary dealers who buy and sell these treasury bills with the Fed. They don't have a choice in this. If you want to be a primary dealer, you have to buy or sell depending on what the Fed wants to do at any given time, right? Yeah. And so by doing that, they say, all right, we want to buy a bunch of treasury bills because we want to inject cash

into the market. Sell those to us. Here's the cash. And by the way, we're not actually giving you this cash to go do anything with. This cash goes into your Federal Reserve account. Remember, and this is really important, Chuck, that account is non-interest bearing. It makes zero sense in both sense of the word to leave money in there. When you as a bank could make some money off of it, loaning it to other banks. So the more money that the Fed has put into those accounts, the more money there is to loan, meaning that interest rate drops. And this is all so arcane. And again, this is like a dozen people who deal with this on a day-to-day basis. But it has a ripple effect in that when you lower the federal funds rate, those banks in turn end up lowering

their rates to people like you and me. It has a cascading effect throughout the economy. Yeah. I think I used to look at the Fed rate and when they would move that and think that's the home mortgage loan rate. Essentially, it translates into that. It does in a certain way, for sure. But I thought the Fed sort of set that until last week. Same here. But it's just, it's passed along on, like you said, both ways, either in better interest rates or worse interest rates for everything across the board for regular schmoes like us. There's also, I mean, you can also buy, you know, we'll talk about inflation in the stock market, which is where I get really confused. But remember how I was talking about like the interest rates have to do with nothing but

risk, basically. If you want to buy, if you want to get out of the stock market and just say, I'm only going to invest in like bonds and things like that and securities, then you're not going to make much money. The return on those is very, very low because they're government backed, which means the risk is very, very low. People play the stock market because ideally you can get like 8% more money every year that you're doing it. Whereas you're making like half of a percent off of like a bond or something. Exactly. And that's the same way like, you know, you make interest when you have money in the bank because the bank wants to use your money. So they're kind of taking a loan from you every day. You just don't realize it, but you get just a tiny,

that's why it doesn't pay to just to keep a ton of money in the bank because you're making a tiny amount there too. Yeah. And so the federal funds rate has an effect on that as well, right, in the real world with the stock market. So if the federal, if the Fed takes a bunch of money out of the market and floods the market with like treasury bills, right? Those treasury bills are easy peasy to come by, which means that they're worth less, which means that people are going to get less money from investing in them, which means they're going to turn to the stock market because you're going to make more money, right? Even though it's riskier that juices the stock market when interest rates are low, when interest rates are high, meaning the Fed has soaked up

a bunch of money and they have sold a bunch of those like treasury bills. That means, yeah, I think I'm right. It's easy to get confused. That means that the interest rate has gone up, which means that you can get more money from those treasury bills, which makes the stock market less attractive to people who are investing in it, which usually signals a cooler economy. That's right. And I guess the final effect here before we break and then talk about inflation, which is so fun, is if the Fed lowers the funds rate, it's going to decrease the value of the dollar on the exchange market, on the foreign exchange market. And that is, it's a little counterintuitive, but a little bit of like a long-term drop is not good. You don't want the

dollar to decrease and stay low. But on the short term, on the near term, it can be good for the American economy because if the dollar drops, then our money's not going to be worth as much elsewhere. So buying things like products or goods or services from overseas is going to be more expensive. So they might turn to the home front to buy some of those goods and services, which can actually inject like kind of supercharge the local American economy on the near term. Right. And so that actually can in turn lead to inflation, accidentally. So if you have low interest rates, that means that money is abundant and cheap. Borrowing is cheap. A lot of people are out spending because interest rates are low. So the dollar is actually deflating, which means

that prices are going up. In some cases, like this is actually good. The Fed wants to keep inflation at about 2% growth per year. So prices are going up. And the reason why the Fed would want to do that, as we'll see, is because if you know that prices are going to generally continue going up, you're going to buy something today rather than putting it off for later. Right. They love you spending money. That's what they want, is Americans buying things constantly. Exactly. So you want prices to go up at a steady rate and a manageable rate. The problem is if money becomes too abundant in the economy, prices start to go up really quick because a lot of people have money, but there's not enough supply to satisfy that demand,

which drives prices up even further, which is pretty much the situation that we find ourselves in now. So to deal with this, the Fed has raised interest rates in the hope that it becomes more expensive to borrow money. People will spend less, and then it becomes more lucrative to save money because interest rates for CDs, for savings accounts, all that stuff goes up. And so you're spending less, prices hopefully come down, but not so much that people start to get laid off because consumer demand has bottomed out. That's right. That's where we're at right now. This is the tightrope that we're watching the Fed kind of transverse right now. That's right. They're on a penny farthing on a tightrope. Yeah. With a little tiny umbrella that's comically small.

Comically small. All right. Well, let's take our final break and we'll finish up with a little bit on inflation and how the interest rate continues to affect that right after this. Hey, I'm Lance Bass, host of the new iHeart podcast Frosted Tips with Lance Bass, the hardest thing can be knowing who to turn to when questions arise or times get tough, or you're at the end of the road. Okay, I see what you're doing. Do you ever think to yourself, what advice would Lance Bass and my favorite boy bands give me in this situation? If you do, you've come to the right place because I'm here to help. This I promise you. Oh, god. Seriously, I swear. And you won't have to send an SOS because I'll be there for you. Oh, man. And so my husband,

Michael, um, hey, that's me. Yep. We know that Michael and a different hot, sexy teen crush boy band are each week to guide you through life step by step. Not another one. Kids, relationships, life in general can get messy. You may be thinking, this is the story of my life. Just stop now. If so, tell everybody, yeah, everybody about my new podcast and make sure to listen so we'll never, ever have to say bye, bye, bye. Listen to Frosted Tips with Lance Bass on the iHeart radio app, Apple podcast, or wherever you listen to podcasts. I'm Mangesh Atikular. And to be honest, I don't believe in astrology. But from the moment I was born, it's been a part of my life. In India, it's like smoking. You might not smoke, but you're

going to get secondhand astrology. And lately, I've been wondering if the universe has been trying to tell me to stop running and pay attention. Because maybe there is magic in the stars, if you're willing to look for it. So I rounded up some friends and we dove in and let me tell you, it got weird fast. Tantric curses, major league baseball teams, canceled marriages, K-pop. But just when I thought I had to handle on this sweet and curious show about astrology, my whole world can crash down. Situation doesn't look good. There is risk to father. And my whole view on astrology, it changed. Whether you're a skeptic or a believer, I think your ideas are going to change too. Listen to Skyline Drive and the iHeart radio app,

Apple podcast, or wherever you get your podcasts. So I have a feeling I'm trying to think of the stuff you should know audience right now. Okay. All of our friends out there. And I feel that 90% of them will not hear this part. Okay. The ones in that 90% that managed to stick this one out are probably like, I'm sort of learning this guys, but it's really confusing. And then there's 10% are economists and people that are sitting back and laughing and going, nope, they got that part wrong. Right. Wrong again.

Sorry guys. Yeah. I feel like if you took all of the information in this episode and cut and paste it into a more coherent way. That's Jerry's job. It would be, yeah, it would be like, we got it. I think we just explained it in a really confusing way. Probably so. We're a little all over the place. All right. So we talked a little bit about inflation that inflation is good in a slow and steady way. What'd you say, 2% a year? Yeah. That's what the Fed shoots for. Shoots for 2%. No inflation at all is not good because that means you're looking at deflation. We talked about stagflation in one of those a long time ago.

What is stagflation? Oh, was that it? Yeah. Yeah. So stagflation is no good. I think that's when the rate is above like a certain percentage and unemployment is below a certain percentage. There's one other indicator. Productivity, I think maybe declines. Maybe. So prices remain high and keep going higher, but the wages are tumbling and people are getting

laid off and like the economy is starting to cool, but prices are staying high. Yeah, because ideally with inflation wages are kind of going up in lockstep. Yeah. Like that's what you want. That's what you want, ideally. I don't know the last time that that actually happened though. You're probably right. Right. So you do want some inflation, but you don't want too much inflation is the upshot of it.

That's right. A lot of, we also did one on inflation too. I can't remember what the name of it, but it was just this past like June, I think. That really? Oh, wow. So there's a couple of explanations about how inflation works. And I don't know that one's necessarily right and the other's wrong. I think it just depends on the context. Yeah, or the way you're looking at it seems like.

But they both seem really familiar. So I think we talked about them in the inflation episode. We would have had to have, but one is called the demand poll theory. And that's kind of the explanation for what's going on right now that because of government stimulus checks, because of productivity being through the roof, because interest rates being really low, the economy has been awash in easy money. Yeah. And people are buying, spending, buying.

A lot of people have a lot of money and are ready to spend it. Also, I think there was a lot of probably pent up demand from hanging around your house. Yeah, sure. Because of COVID, now you're like, oh, take my money. I want to do something interesting. You know, I'm so bored. Yeah. It's unprecedented stuff these past couple of years.

Right. I don't think anyone really knew what the overall effect was going to be. Right. So the tightrope, if you look closely, is actually a ultra sharp razor blade. Yeah. That the Fed is on, thanks to this unprecedented event that we've just gone through. That's right. That they're trying to deal with.

So the idea of a bunch of people having a bunch of money, wanting everything all at once, from houses to cars to game boys, maybe. Sure. They still are for them. Vintage game boys to poison t-shirts. Like that means that we're all competing with one another for the finite supply of those things, which means that people selling them, thanks to just supply and demand, basic capitalism and economics, those prices rise.

That's right. That's inflation. That's the demand poll theory. That's right. The other is cost push. And this is basically kind of the opposite of that in some ways. It's the cost of doing business is going up. It is sort of separated from demand in that way.

And there are all kinds of reasons this might happen. Dave mentioned a couple that like labor unions might have to pay people a lot more. More money because they negotiated a new contract or something. Exporting foreign goods shoots through the roof or something. Or maybe there's a new administration. All of a sudden there's new taxes going on. But basically it's cost push because the rise in cost of doing that business, any business, is going to push the price of the products higher and higher and higher.

Right. But it has nothing to do with demand necessarily. It's just now it's become the cost of doing businesses become more expensive. Right. And now this is where I did pretty good with this stuff until interest rates affecting inflation because it seemed, I don't know, it just seemed so rigged and like, I hate saying that word now. But that's the whole thing. That's the entire point of what the Fed is doing by raising that interest rate by half of a percent.

Manipulate it, I guess. They're trying to manipulate the economy and they're trying to do it in just the right way so that they can keep inflation, keep inflation, slow it down. They can keep it in check. But at the same time, they don't want to bring prices down so much that businesses have less incentive to produce goods. Right? Because right now with prices really high, businesses are doing everything they can to get

out as many widgets as possible because they can sell them for historically high prices right now. If prices fall, eventually you get to a point where businesses are like, it's not really worth the investment. I don't need this many people to make this many widgets anymore. Yeah, start laying people off. Start laying people off so unemployment starts to go up and all of a sudden, you've overstepped. You've cooled the economy too much by adjusting or by targeting inflation by adjusting the interest rate.

That's the precarious position that they're in right now. They're trying to create that soft landing to get prices back down to a normal rate of inflation without cooling off the economy inadvertently. That's right. What I meant to look up to see, is it always by quarters of a point? No, I mean, they just did a half of a point. No, but that's two quarters. Oh, I see what you're saying.

Yeah. Is there an increment that's less than that? Not that I've ever seen. Okay, so they go a quarter at a time? I feel like a quarter or a half or three quarters. Yeah, I think the most I saw was 1.75 or something like that. Really? That was back in 2000, I think.

So the last time they had such a huge hike as a half of a percent, it was actually like two and three quarters of a percent. Oh, wow. Because I think of the dot-com bubble. Right. And they probably overstepped because there's a recession after that. Right. And then the housing situation.

Yeah, that came later. Right. Yeah. But that was, I'm sure all of that is affected. All the tendrils affect one another. I'm sure. I think there was somebody who had a theory that every recession was connected to the last one somehow.

Well, they say we're headed for one since the 1950s. There are economists that say every time we've exceeded 4% inflation, unemployment was below 5%, then recession comes within two years of that moment. And that has happened here in April, 2022. Right. So they're saying recession is probably coming, historically speaking. Yeah, and so there's some tips if you want to prepare for recession. It's not necessarily the end of the world.

One thing is because job market is so hot right now, if you've been sitting there thinking like, maybe I'll get a job, go get a job now. Yeah. So you don't have to try to get a job during a recession. You can already have the job. If you're thinking of selling your house, especially if you can down some, size, this is a good time to sell because the housing market is really high right now, but you can expect it to come down if we go into a recession.

Right. Set a little cash aside if you can. Sure. And then if you're an investor, if you have stocks, sticks to your plan. Don't panic. Don't worry. Just stay the course. Yeah.

You can weather a recession and your stock prices will eventually go back up on the other side. Yeah. You know what? There was one thing I meant to mention before that's worth pointing out real quick is that, remember we were talking about the Fed sets this rate that banks, you know, they lend each other money and stuff. Yeah, the federal funds rate. Yeah.

They don't actually say like you have to use this rate. Like banks still negotiate that with each other. Right. But they're saying like that's the target rate and then they do things to try and nudge these banks toward that rate. Right. And that's what they're doing when they're buying or selling bonds on the market. Right.

They're injecting or removing cash to make that the banks actually charge closer to that target rate they've set. That's how they manipulate. Right. But it's not like a bank says, well, we can only charge this because the Fed said so. That's what I'm saying. Yeah. It'd be so much easier and so much more straightforward as the Fed said,

this is what you can charge each other for the overnight rate. And then adjust that rather than setting a target and then manipulating the markets. Yeah, but then that takes negotiation out of the deal and like. It's just no fun. Yeah. It's probably it actually. You got anything else? I got nothing else.

Well, that was a good first take. Let's start over and try it again. Well, since Chuck's made that sound, of course, that means it's time for listener mate. I'm going to call this a new gin and tonic recipe. I want to try. Oh yeah, sounds good. This just came in. Hey guys, been listening for a few years down under and was keen to learn about more about

champagne as a fan of the bubbly beverage. But I got an extra treat when you went on a tangent about gin. This must have been a select champagne. Yeah. Our champagne one came out this past Saturday in real life. IRL. So although I must say the best gin in the world now comes from Australia, arguably Tasmania.

I'm also a big fan of the St. George's shareware. And Chuck, it does not taste like feet. And maybe you should stop soaking your socks, your lime and your sock. So this is a cocktail recipe I'm going to try because it all sounds lovely. And this is from Meg. Just get your basic London dry gin and tonic. But instead of just squirting a lime in there, squeeze some orange in there and add a full rind and then rub a fresh rosemary stick.

Get that thing activated and then put that in there and stir it around. You sound like you're making this listener male up. No, no, no, and then in cracked pepper. So you basically got a gin and tonic with orange, rosemary and black pepper. Yeah, be careful with the pepper though. I've had it before with even just not cracked but whole peppercorns. You can accidentally burn your throat pretty good. Oh, really?

Yeah, because the gin gets it ready and the black pepper finishes the job. Okay. Well, I'm going to try it out. That's from Meg in Australia. Just remember a little goes a long way. Little goes a long way. Thanks a lot, Meg. We appreciate that. We love new gin recipes, really any kind of recipe.

Yeah. If you want to get in touch with us like Meg did and give us a recipe or just say hi or whatever, you can send us an email to stuffpodcast.ihartradio.com. Stuff you should know is a production of iHeartRadio. For more podcasts, my heart radio, visit the iHeartRadio app, Apple Podcasts, or wherever you listen to your favorite shows. Badie about my new podcast and make sure to listen. So we'll never ever have to say bye, bye, bye.

Listen to Frosted Tips with Lance Bass on the iHeart Radio app, Apple Podcasts, or wherever you listen to podcasts. I'm Munga Chauticular and it turns out astrology is way more widespread than any of us want to believe. You can find in major league baseball, international banks, K-pop groups, even the White House. But just when I thought I had a handle on this subject, something completely unbelievable happened to me and my whole view on astrology changed. Whether you're a skeptic or a believer, give me a few minutes

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