The Federal Reserve’s policy-setting committee lifted interest rates on Feb. 1, 2023, by a quarter of a percentage point to a range of 4.5% to 4.75%. The increase, the smallest since the Fed began an aggressive campaign of rate hikes in March 2022, came amid signs the fastest pace of inflation in decades is cooling. But the Fed also indicated more rate hikes are coming.

So why is the Fed slowing the size of rate increases now, and what does it mean for consumers? We asked finance scholar William Chittenden from Texas State University to explain what’s going on and what comes next.

Why did the Fed raise rates by only a quarter point?

The Fed is trying to figure out whether last year’s rate hikes have slowed the economy enough to get inflation near its target of about 2%.

By raising what’s known as the Fed funds rate, the U.S. central bank makes borrowing more expensive, which means buying large-ticket items, like cars and homes, is more costly. This should lead to fewer people buying cars, which will likely result in lower car prices.

In 2022, the Fed lifted rates eight times by a total of 4.25 percentage points, which helped prompt inflation to drop to an annual pace of 6.5% in December from 9.1% at its peak in June.

To understand why it’s so hard for the Fed to figure out if its rate hikes worked, think of the economy as a fully loaded oil tanker out in the ocean. Naturally, it’s chugging along as fast it can to reach a specific destination, but it takes a long time from the captain “stepping on the brakes” to when the ship actually stops moving forward.

Similarly, the Fed is raising rates to slow the economy – sort of like stepping on the brakes – and bring inflation down to 2%, but there’s often a long delay between the hikes and their impact on the economy.

But if the Fed eases off the brakes too early, inflation could remain high. If it presses on them too hard, unemployment will likely shoot up and the economy will slide into a recession. By increasing interest rates only a quarter-point, the Fed is signaling that it believes the economy has begun to slow down and is on a path to 2% inflation.

Does this mean borrowing costs will start coming down?

The Fed funds rate acts as a base rate for shorter-term interest rates, such as for car loans and credit cards. As it goes up, short-term borrowing rates increase by about the same amount.

The financial markets are predicting about an 80% chance the Fed’s benchmark lending rate will top out around 5% this summer – which means they’re expecting rates to go just a little bit higher.

Rates on shorter-term borrowing are unlikely to come down, but if markets are right, they probably won’t increase much more.

However, for long-term borrowing costs, as on a 30-year mortgage, rates are already coming down and are likely to fall some more – good news for homebuyers.

How about inflation – can consumers expect prices to start falling?

Overall, yes, inflation is already starting to come down – and prices on some items are even falling.

For example, used-car prices, which soared earlier in the COVID-19 pandemic, have dropped in recent months, while prices of dozens of other items, such as flour, clothes and gasoline, have eased.

However, some costs continue to increase. Egg prices soared after the supply was disrupted because of avian flu, which killed off nearly 53 million egg-laying hens. Unfortunately, increasing interest rates will not bring back those birds or help decrease the cost of eggs.

In addition, nothing the Fed does will affect the war in Ukraine, which has led to higher world wheat and energy prices.

The point being, the Fed can’t really address certain types of inflation.

Does all this mean the U.S. will avoid recession?

That’s the trillion-dollar question.

Fed officials have at times sounded hopeful that they can bring down inflation without crashing the economy – a so-called soft landing. During his press conference after the latest announcement Feb. 1, 2023, Fed Chair Jerome Powell was more cautious, saying it’s too soon to declare victory. But he noted: “We can now say for the first time that the disinflationary process has started.”

Economic forecasters have been less confident that the U.S. will avoid a recession. On average, economists surveyed this past month by The Wall Street Journal forecast a 61% probability of a recession in 2023. In addition, key economic indicators point to a recession, while the yield curve – a bond market metric that has been successful at predicting recessions – currently puts the odds at about 47%.

In my view, this all adds up to: Nobody really knows. My best advice to consumers out there is to prepare financially for a recession, but let’s not give up hope that the Fed can slow the economy without crashing it.

William Chittenden, Associate Professor of Finance, Texas State University

This article is republished from The Conversation under a Creative Commons license. Read the original article.

When the Federal Reserve convenes at the end of January 2023 to set interest rates, it will be guided by one key bit of data: the U.S. inflation rate. The problem is, that stat ignores a sizable chunk of the country – rural America.

Currently sitting at 6.5%, the rate of inflation is still high, even though it has fallen back slightly from the end of 2022.

The overall inflation rate, along with core inflation – which strips out highly volatile food and energy costs – is seen as key to knowing whether the economy is heating up too fast, and guided the Fed as it imposed several large 0.75 percentage point interest rate increases in 2022. The hope is that raising the benchmark rate, which in turn increases the costs of taking out a bank loan or mortgage, for example, will help reduce inflation back to the Fed target of around 2%.

But the main indicator of inflation, the consumer price index, is compiled by looking at the changes in price specifically urban Americans pay for a set basket of goods. Those living in rural America are not surveyed.

As economists who study rural America, we believe this poses a problem: People living outside America’s cities represent 14% of the U.S. population, or around 46 million people. They are likely to face different financial pressures and have different consumption habits than urbanites.

The fact that the Bureau of Labor Statistics surveys only urban populations for the consumer price index makes assessing rural inflation much more difficult – it may even be masking a rural-urban inflation gap.

To assess if such a gap exists, one needs to turn to other pricing data and qualitative analyses to build a picture of price growth in nonurban areas. We did this by focusing on four critical goods and services in which rural and urban price effects may be significantly different. What we found was rural areas may indeed be suffering more from inflation than urban areas, creating an underappreciated gap.

1. The cost of running a car in the country

Higher costs related to cars and gas can contribute to a urban-rural inflation gap, severely eating into any discretionary income for families outside urban areas, a 2022 report found.

This is likely related to there being considerable differences in vehicle purchases, ownership and lengths of commutes between urban and rural Americans.

Car ownership is integral to rural life, essential for getting from place to place, whereas urban residents can more easily choose cheaper options like public transit, walking or bicycling. This has several implications for expenses in rural areas.

Rural residents spend more on car purchases out of necessity. They are also more likely to own a used car. During the first year of the COVID-19 pandemic, there was a huge increase in used car prices as a result of a lack of new vehicles due to supply chain constraints. These price increases likely affected remote areas disproportionately.

Rural Americans tend to drive farther as part of their day-to-day activities. Because of greater levels of isolation, rural workers are often required to make longer commutes and drive farther for child care, with the proportion of those traveling 50 miles (80 kilometers) or more for work having increased over the past few years. In upper Midwest states as of 2018, nearly 25% of workers in the most remote rural counties commute 50 miles (80 kilometers) or more, compared with just over 10% or workers in urban counties.

Longer journeys mean cars and trucks will wear out more quickly. As a result, rural residents have to devote more money to repairing and replacing cars and trucks – so any jump in automotive inflation will hit them harder.

Though fuel costs can be volatile, periods of high energy prices – such as the one the U.S. experienced through much of 2022 – are likely to disproportionately affect rural residents given the necessity and greater distances of driving. Anecdotal evidence also suggests gas prices can be higher in rural communities than in urban areas.

2. Rising cost of eating at home – and traveling for groceries

As eating away from home becomes more expensive, many households may choose to eat in more often to cut costs. But rural residents already spend a larger amount on eating at home – likely due in part to the slimmer choices available for eating out.

This means they have less flexibility as food costs rise, particularly when it comes to essential grocery items for home preparation. And with the annual inflation of the price of groceries outpacing the cost eating out – 11.8% versus 8.3% – dining at home becomes comparably more expensive.

Rural Americans also do more driving to get groceries – the median rural household travels 3.11 miles (5 kilometers) to go to the nearest grocery store, compared with 0.69 miles (1.1 kilometers) for city dwellers. This creates higher costs to feed a rural family and again more vehicle depreciation.

Rural grocery stores are also dwindling in number, with dollar stores taking their place. As a result, fresh food in particular can be scarce and expensive, which leads to a more limited and unhealthy diet. And with food-at-home prices rising faster than prices at restaurants, the tendency of rural residents to eat more at home will see their costs rising faster.

3. The cost of growing old and ill outside cities

Demographically, rural counties trend older – part of the effect of younger residents migrating to cities and college towns for either work or educational reasons. And older people spend more on health insurance and medical services. Medical services overall have been rising in cost too, so those older populations will be spending more for vital doctors visits.

Again with health, any increase in gas prices will disproportionately hit rural communities more because of the extra travel needed to get even primary care. On average, rural Americans travel 5 more miles (8 kilometers) to get to the nearest hospital than those living in cities. And specialists may be hundreds of miles away.

4. Cheaper home costs, but heating and cooling can be expensive

Rural Americans aren’t always the losers when it comes to the inflation gap. One item in rural areas that favors them is housing.

Outside cities, housing costs are generally lower, because of more limited demand. More rural Americans own their homes than city dwellers. Since owning a home is generally cheaper than renting during a time of rising housing costs, this helps insulate homeowners from inflation, especially as housing prices soared in 2021.

But even renters in rural America spend proportionately less. With housing making up around a third of the consumer price index, these cost advantages work in favor of rural residents.

However, poorer-quality housing leaves rural homeowners and renters vulnerable to rising heating and cooling costs, as well as additional maintenance costs.

Inflation – a disproportionate burden

While there is no conclusive official quantitative data that shows an urban-rural inflation gap, a review of rural life and consumption habits suggests that rural Americans suffer more as the cost of living goes up.

Indeed, rural inflation may be more pernicious than urban inflation, with price increases likely lingering longer than in cities.

Stephan Weiler, Professor of Economics, Colorado State University and Tessa Conroy, Economic Development Specialist, University of Wisconsin-Madison

This article is republished from The Conversation under a Creative Commons license. Read the original article.

California is embarking on an audacious new climate plan that aims to eliminate the state’s greenhouse gas footprint by 2045, and in the process, slash emissions far beyond its borders. The blueprint calls for massive transformations in industry, energy and transportation, as well as changes in institutions and human behaviors.

These transformations won’t be easy. Two years of developing the plan have exposed myriad challenges and tensions, including environmental justice, affordability and local rule.

For example, the San Francisco Fire Commission had prohibited batteries with more than 20 kilowatt-hours of power storage in homes, severely limiting the ability to store solar electricity from rooftop solar panels for all those times when the sun isn’t shining. More broadly, local opposition to new transmission lines, large-scale solar and wind facilities, substations for truck charging, and oil refinery conversions to produce renewable diesel will slow the transition.

I had a front row seat while the plan was prepared and vetted as a longtime board member of the California Air Resources Board, the state agency that oversees air pollution and climate control. And my chief contributor to this article, Rajinder Sahota, is deputy executive officer of the board, responsible for preparing the plan and navigating political land mines.

We believe California has a chance of succeeding, and in the process, showing the way for the rest of the world. In fact, most of the needed policies are already in place.

What happens in California has global reach

What California does matters far beyond state lines.

California is close to being the world’s fourth-largest economy and has a history of adopting environmental requirements that are imitated across the United States and the world. California has the most ambitious zero-emission requirements in the world for cars, trucks and buses; the most ambitious low-carbon fuel requirements; one of the largest carbon cap-and-trade programs; and the most aggressive requirements for renewable electricity.

In the U.S., through peculiarities in national air pollution law, other states have replicated many of California’s regulations and programs so they can race ahead of national policies. States can either follow federal vehicle emissions standards or California’s stricter rules. There is no third option. An increasing number of states now follow California.

So, even though California contributes less than 1% of global greenhouse gas emissions, if it sets a high bar, its many technical, institutional and behavioral innovations will likely spread and be transformative.

What’s in the California blueprint

The new Scoping Plan lays out in considerable detail how California intends to reduce greenhouse gas emissions 48% below 1990 levels by 2030 and then achieve carbon neutrality by 2045.

It calls for a 94% reduction in petroleum use between 2022 and 2045 and an 86% reduction in total fossil fuel use. Overall, it would cut greenhouse gas emissions by 85% by 2045 relative to 1990 levels. The remaining 15% reduction would come from capturing carbon from the air and fossil fuel plants, and sequestering it below ground or in forests, vegetation and soils.

To achieve these goals, the plan calls for a 37-fold increase in on-road zero-emission vehicles, a sixfold increase in electrical appliances in residences, a fourfold increase in installed wind and solar generation capacity, and doubling total electricity generation to run it all. It also calls for ramping up hydrogen power and altering agriculture and forest management to reduce wildfires, sequester carbon dioxide and reduce fertilizer demand.

This is a massive undertaking, and it implies a massive transformation of many industries and activities.

Transportation: California’s No. 1 emitter

Transportation accounts for about half of the state’s greenhouse gas emissions, including upstream oil refinery emissions. This is where the path forward is perhaps most settled.

The state has already adopted regulations requiring almost all new cars, trucks and buses to have zero emissions – new transit buses by 2029 and most truck sales and light-duty vehicle sales by 2035.

In addition, California’s Low Carbon Fuel Standard requires oil companies to steadily reduce the carbon intensity of transportation fuels. This regulation aims to ensure that the liquid fuels needed for legacy cars and trucks still on the road after 2045 will be low-carbon biofuels.

But regulations can be modified and even rescinded if opposition swells. If battery costs do not resume their downward slide, if electric utilities and others lag in providing charging infrastructure, and if local opposition blocks new charging sites and grid upgrades, the state could be forced to slow its zero-emission vehicle requirements.

The plan also relies on changes in human behavior. For example, it calls for a 25% reduction in vehicle miles traveled in 2030 compared with 2019, which has far dimmer prospects. The only strategies likely to significantly reduce vehicle use are steep charges for road use and parking, a move few politicians or voters in the U.S. would support, and a massive increase in shared-ride automated vehicles, which are not likely to scale up for at least another 10 years. Additional charges for driving and parking raise concerns about affordability for low-income commuters.

Electricity and electrifying buildings

The key to cutting emissions in almost every sector is electricity powered by renewable energy.

Electrifying most everything means not just replacing most of the state’s natural gas power plants, but also expanding total electricity production – in this case doubling total generation and quadrupling renewable generation, in just 22 years.

That amount of expansion and investment is mind-boggling – and it is the single most important change for reaching net zero, since electric vehicles and appliances depend on the availability of renewable electricity to count as zero emissions.

Electrification of buildings is in the early stages in California, with requirements in place for new homes to have rooftop solar, and incentives and regulations adopted to replace natural gas use with heat pumps and electric appliances.

The biggest and most important challenge is accelerating renewable electricity generation – mostly wind and utility-scale solar. The state has laws in place requiring electricity to be 100% zero emissions by 2045 – up from 52% in 2021.

The plan to get there includes offshore wind power, which will require new technology – floating wind turbines. The federal government in December 2022 leased the first Pacific sites for offshore wind farms, with plans to power over 1.5 million homes. However, years of technical and regulatory work are still ahead.

For solar power, the plan focuses on large solar farms, which can scale up faster and at less cost than rooftop solar. The same week the new scoping plan was announced, California’s Public Utility Commission voted to significantly scale back how much homeowners are reimbursed for solar power they send to the grid, a policy known as net metering. The Public Utility Commission argues that because of how electricity rates are set, generous rooftop solar reimbursements have primarily benefited wealthier households while imposing higher electricity bills on others. It believes this new policy will be more equitable and create a more sustainable model.

Industry and the carbon capture challenge

Industry plays a smaller role, and the policies and strategies here are less refined.

The state’s carbon cap-and-trade program, designed to ratchet down total emissions while allowing individual companies some flexibility, will tighten its emissions limits.

But while cap-and-trade has been effective to date, in part by generating billions of dollars for programs and incentives to reduce emissions, its role may change as energy efficiency improves and additional rules and regulations are put in place to replace fossil fuels.

One of the greatest controversies throughout the Scoping Plan process is its reliance on carbon capture and sequestration, or CCS. The controversy is rooted in concern that CCS allows fossil fuel facilities to continue releasing pollution while only capturing the carbon dioxide emissions. These facilities are often in or near disadvantaged communities.

California’s chances of success

Will California make it? The state has a track record of exceeding its goals, but getting to net zero by 2045 requires a sharper downward trajectory than even California has seen before, and there are still many hurdles.

Environmental justice concerns about carbon capture and new industrial facilities, coupled with NIMBYism, could block many needed investments. And the possibility of sluggish economic growth could led to spending cuts and might exacerbate concerns about economic disruption and affordability.

There are also questions about prices and geopolitics. Will the upturn in battery costs in 2022 – due to geopolitical flare-ups, a lag in expanding the supply of critical materials, and the war in Ukraine – turn out to be a hiccup or a trend? Will electric utilities move fast enough in building the infrastructure and grid capacity needed to accommodate the projected growth in zero-emission cars and trucks?

It is encouraging that the state has already created just about all the needed policy infrastructure. Additional tightening of emissions limits and targets will be needed, but the framework and policy mechanisms are largely in place.

Rajinder Sahota, deputy executive officer of the California Air Resources Board, contributed to this article.

Daniel Sperling, Distinguished Blue Planet Prize Professor of Civil and Environmental Engineering and Founding Director, Institute of Transportation Studies, University of California, Davis

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Two weeks later, the board voted 3-2 to approve the grand jury’s recommendations. Opposing the increase were then-supervisors Anthony Farrington and Rob Brown, who had defeated Mackey’s planning commissioner Peggy McCloud — who ran to succeed Mackey, who was retiring — and Merriman, respectively, in elections the previous year that had seen the raises being a campaign issue.

Editor’s note: Information about the 2000 election has been corrected.