The Consumer Price Index statistics and Producer Price Index statistics that came out this week were bad they show clearly that inflation isn't under control, isn't on a trajectory to two to three percent annual increases. This has turned a lot of people's world upside down because they thought that inflation had peaked and the Federal Reserve Board would pull back on the use of its tool of raising interest rates to control inflation. So now lots of people are talking about the FED at their next meeting and possibly at the subsequent meeting raising the Fed Funds rate one point as opposed to a maximum of three quarters of a point. This is a stupidity on steroids idea the FED raising interest rates one percentage point in the foreseeable future is going to send the message to the American public that the FED is afraid it won't be able to get inflation under control and so is making this extreme step and this fear will spread businesses and consumers will conclude the nation is facing a very deep recession and so businesses won't make capital expenditures and consumers won't spend choosing prudence to conserve cash and this fear contagion will be self-fulfilling it will cause a very deep recession! Next week the FED should come out and say we aren't in the foreseeable future raising the interest rate one percentage point at a single meeting it is a stupid idea so no one has to worry about us doing it. The FED should raise the interest rate at its next meeting three quarters of a point like it did at the last two meetings and say it is likely to do the same at its November meeting consistent with its previously announced strategy of taking strong action to get the annual inflation rate to its two percent target. Further the FED should announce that once the FED hits its peak on raising the interest rate it will not lower that rate before the end of 2024 because inflation has innate inertia and the FED must wait and be sure this innate inertia has run its course and inflation is on a downward trajectory before it raises interest rates. The innate inertia of inflation being that once prices of goods and services increase higher than ordinary than workers want and get higher wages to pay the higher prices which increases businesses cost which businesses pass on in terms of higher prices plus and this becomes a cycler thing, causing consecutive price increases. Further, in a high inflation environment businesses often hold back on price increases on their products and services because they don't want to lose sales they eat the increase on their costs but eventually they have to pass it on so they can be financially sound as a business. All these price increase mechanisms take time to run their course! If the FED is really concerned about doing its job it will let the American public know that even after the FED has peaked on its raising of interest rates and moves to dial rates lower it will likely be small tweaks and it may have to reverse and dial them back up because there is multiple factors existing that will drive inflation which did not exist before the Covid Pandemic. The FED should let the public know that this higher interest rate environment may last on the order of the next six years! These factors include that Washington has handed over control of the price of fossil fuels to the leaders of OPEC plus countries and this pricing affects inflation and has clearly been the case since the early 1970's and still is in spite of the prevalence of renewable energy and EV vehicles; Washington dropping the ball here is evidenced in part by the Inflation Reduction Act which made leases of federal land for domestic production exponentially more expensive and the making of environmental regulations on this industry dramatically harsher! OPEC plus increasing prices on fossil fuels is extremely clear when one considers a couple of weeks ago the Saudi Energy Minister saying we have to stabilize prices when the price of a barrel of oil was trading over one hundred dollars and just this week OPEC saying the energy markets are in a Schizophrenic state (the low price doesn't comport with high demand) and OPEC will have to take action to right the price. Another factor, is that when the FED does what it must do and raises interest rates to combat inflation it takes a meat clever to the new home market which puts subcontractors out of businesses and workers out of the industry so that when interest rates lower there is less supply in the industry which creates inordinate upward pressure on home prices, there is a residual lingering inflation effect here which the FED will have to deal with. Plus with this global supply chain which our leaders have stuck us with when demand increases prices increase, there isn't the domestic competition to lower prices, so when the FED tries to normalize things by lowering interest rates this will increase the American consumers buying power which will increase demand which will drive up prices, so this is another upward force on interest rates the FED will have to deal with!
I always have to laugh, just a little, at the irony of this all.. Folks, who got free money, now expect that they should get a return on it, and if interest rates have to go through the roof, so be it. And if folks become scared, and lack the desire to invest, or consume, who cares. This is the lesson of the world around us. It is hard to reconcile the greed of these people.
The FED is the problem. Interest rates should always be higher than inflation. That’s the natural order. Nobody would voluntarily loan money at less than the inflation rate, that’s an instant loss of money. And when inflation is higher than the interest rate, there is little incentive to save, lots of incentive to borrow, and lots of incentive to spend. More spending increases the velocity of money that causes inflation to increase. ZIRP and QE and printing money and spending like loons caused this economic situation. And before anyone starts blaming Biden or Trump, this started 40 years ago, it’s accelerated constantly, it’s now reached the breaking point.
The bubble needs to be popped. Refusing to stop keeping interest rates artificially low will just prolong the inevitable.
