In an effort to fight inflation that's hit 40-year highs, the Federal Reserve has raised its benchmark interest rate three times so far this year, including its most aggressive hike in decades in mid-June. But interest rates should soon stabilize, according to Danetha Doe, an economist at Clever Real Estate and the creator of Money & Mimosas. In an interview on Motley Fool Live, recorded on June 22, Doe tells Motley Fool contributor Marc Rapport what leads her to believe that -- and what is likely to happen if rates don't stabilize.
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Danetha Doe: [laughs] My crystal ball, let me pull it out. I do believe we'll see interest rates stabilize. I believe that the intention behind raising the interest rates was to help stabilize the housing market, and if the month of April and May are any indicators, it looks it's doing its job. We are starting to see some aspects of the housing market cool off. So I do think that the interest rates will start to see that stabilize because the other downside for not stabilizing is we might experience more stagflation within the economy, which would not be a good situation for anyone.
Marc Rapport: What is stagflation?
Danetha Doe: Stagflation is a combination of a stagnant economy with rising inflation. Meaning, wages and salaries are pretty stagnant, they are stable, they don't increase, but inflation is increasing. So the cost of living is increasing, although the wages and salaries are not increasing. The last time we saw stagflation here in the United States was in the 1970s and it was pretty terrible. The Fed felt that their only response was actually to create a recession and so unemployment during that time rose to 10 percent in order to stabilize the economy, to bring the cost of living down. I do believe that the Fed doesn't want to experience that again, we don't want to manufacture a recession, which is why I believe that interest rates will start to stabilize at some point.
