• December 2, 2022

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Disappointing Nowcasts For Upcoming Inflation Highlight Fed’s Concerns

U.S. Federal Reserve Chair Jerome Powell indicated that rate hikes may be ending in early 2023, but he still worries about inflation. Though we’ve seen encouraging inflation data for the month …

Wall Street and the media continue to warn that a fearful recession is headed our way. Why? For proof, they offer a hodgepodge of observations and simplistic data “analysis” (Mortgage rates! Inventories! Gas prices! Too strong dollar!). All those items are offshoots from the main gripe: The Fed is raising interest rates too high and too fast.

What’s at work? Ignorance or…?

Media reporters and editors might be excused for lacking the knowledge and experience to properly understand what’s going on. However, Wall Streeters have no such excuse. They know better, and that raises the question as to why they are so vocal and adamant. Cutting to the heart of the issue is this question: “Why is a 3.25% interest rate, headed to 4%, a call to arms?”

To get to the answer, we need to examine the losers and winners of the 0% interest rate policy.

The losers

The Fed’s abnormal 0% interest rate policy, initiated in 2008, pushed people, funds and organizations into unwanted risk. It was the only way they could earn some income as inflation of about 2% ate up purchasing power every year.

Although sold as a win-win proposition, the 0% interest rate policy produced a loss of income and purchasing power for many: savers, retirees, investors, local/state governments, nonprofit organizations, insurance companies, trust funds, pension funds and cash-rich companies.

The lost income and purchasing power suffered by those holders of tens of $trillions was an enormous, never-to-be recouped, permanent loss. Cumulatively, since the 0% rates started in 2008, the lost purchasing power is over 20% – one fifth of the value of these funds. Add to that whatever “real” (above inflation) interest could have been earned, and the total loss becomes significantly larger.

The additional harm: Inequity and inequality

Clearly, the lost income and purchasing power was inequitable (that is, unbalanced and biased). Through no fault of their own, millions of people and thousands of organizations were harmed by the Fed’s actions, but they had no recourse.

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Making matters worse was inequality. The widely reported gains during the thirteen years by the top 1% were aided by the Federal Reserve’s actions. The low-cost debt readily available to these individuals (and their trusts, funds, organizations and businesses) increased income and returns – i.e., more wealth.

Note: There wasn’t anything underhanded about these actions and results. It was simply a matter of taking advantage of the Federal Reserve’s abnormally low interest rate gift.

The criticized return to normality

Now, regarding the Fed’s interest rate rising – There is no valid reason for fretting about the increases. The Federal Reserve simply is moving rates up towards where the capital markets would set them (AKA, normality). So, why are people upset to see their savings, CD and money market fund income rising? Well, those people are not.

The critics are those who are losing their premier status. Obviously, they can’t very well say they’re upset because they’re losing their honeypot. So, they’re back to their effective 2018 campaign of recession warnings based on “inverted yield curve” and “overly large rate increase.” Despite the overabundance of “expert” recession warnings (especially including the nonsensical 100% certainty one from Bloomberg), allowing rates to rise to a normal, market-determined level will not cause a recession. Instead, it will help rid the system of the long-running inequity and inequality.

The bottom line – Roasting the Federal Reserve is not new

The Federal Reserve has made plenty of mistakes in the past. After all, important decisions are being made by only a dozen economists meeting periodically. They review the latest economic data to decide what to do. Doing nothing would be the best approach most of the time.

Supporting the financial system when there is a serious problem is certainly a time for action. The opposite action – stepping in to temper “too high” growth – remains a debated action. One thing is certain: Keeping a 0% (negative real) interest rate policy for thirteen years in order to “improve the economy” is clearly improper. Allowing the capital markets to fully function would have produced better (and fairer) results.

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