As the new year begins, there is cautious optimism on Wall Street that the Federal Reserve will continue to moderate or perhaps reverse its moves to raise the federal funds rate. The Fed’s policies of increasing the rate target have led to expectations that a recession with rising unemployment will develop. What is the federal funds rate, and what is its relationship to the chances of a 2023 recession?
Federal law requires that commercial banks keep a certain amount of ready cash on hand either in the form of legal tender currency — paper money and coins — or deposits in one of twelve district Federal Reserve Banks making up the Federal Reserve System. The federal funds rate is the interest rate on loans commercial banks make to other commercial banks overnight.
When a bank is short of legally required cash reserves, it borrows from other banks that have a surplus over the legally required minimum. The money market is said to be tightening when the rate is rising. When the rate is declining, the money market is said to be easing. A tightening market precedes a recession, while an easing market points to an economic recovery. The Open Market Committee of the Federal Reserve System (today headed by Chairman Jerome Powell) — through the Federal Reserve Bank of New York — sets a target range for this interest rate, called “fed funds.” The fed funds target is currently between 4.25% and 4.50%.
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The final two months of 2022 were full of events promising to lead to even more important ones in 2023. Here’s a list of some of the most important.
1. Railroad workers
What may be the most significant event of November-December 2022 was the Biden administration’s decision, backed by Congressional Democrats and Republicans, to force a contract on railroad workers without meeting their basic demand for sick days! This might be tolerable if workers never got sick. However, rail bosses and their government servants denied sick days despite the continuing global COVID-19 pandemic that’s taken more than a million lives in the U.S. and continues claiming victims here and around the world daily. Forcing workers to work sick spreads disease. This refusal of the railroad bosses and government is dangerous and potentially deadly to people beyond the railroad industry.
The great labor upsurge of the 1930s, represented by the Congress of Industrial Organizations (CIO), established industrial unions in basic industry outside the Jim Crow South, but the upsurge bypassed the railroad industry. Since rail’s origin, the government hasn’t recognized their right to strike. Since then, rail workers have been hobbled by weak craft unions. The need to organize along industrial lines — where all workers in an industry belong to a single union regardless of craft — was realized long ago by conservative craft unionist Eugene Debs. In the 1890s, he came to this conclusion not by reading books but through his daily experience as a rail worker and union leader.
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