The Federal Reserve is getting ready to raise interest rates, the central bank said in its monetary policy update Wednesday. For now, the Fed plans to keep rates near zero.
“With inflation well above 2% and a strong labor market, the Committee expects it will soon be appropriate to raise the target range for the federal funds rate,” the Fed statement read. Chairman Jerome Powell confirmed that March is likely the right time frame to anticipate.
The FED is about to embark on a unwise and dangerous path for our national and individual financial health by increasing the prime.
Government response after the 1929 Black Friday crash and subsequent monetary policy, which actually restricted access to credit and tightened the money supply, deepened the trough of the Great Depression.
It was famed economist, John Maynard Keynes, who revolutionized our thinking — prime the pump, he said. Government injected money into the system, hired workers, initiated spending to allow market forces to once again work optimally.
Inflation is clearly knocking at our door. The traditional remedy is to raise FED interest rates to make borrowing more expensive and slow consumer and business spending.
We are not experiencing an inflationary model — this is StagFlation, as witnessed in the Nixon/Ford/Carter years. The SARS-CoV-2 pandemic crinkled the long lines in our global supply chains.
Generally, in economics, stagflation or recession-inflation is a situation where the inflation rate is high, but economic growth rate slows, and unemployment remains steadily high. The phenomena presents a dilemma for economic policy, since actions intended to lower inflation may exacerbate unemployment.
This Variant of StagFlation is marked by high inflation with unequal economic growth and high unemployment in some sectors of the economy. We do not have enough nurses or teachers or truck drivers or construction workers or restaurant staff, for example. In other sectors, employment is high.
The U.S. Department of Labor (USDOL) reported the U.S. economy grew at 5.7% in 2021, which is the fastest rate since the Reagan administration in 1984. Additionally, the USDOL claims the unemployment rate dropped to 3.9% in December, which is the lowest since before the pandemic.
On the other hand, store shelves are bare in many communities. Consumers can’t find new cars. Meat supplies are scarce. Demand for homes in some communities, such as Boise, Idaho, are causing prices to skyrocket. Americans are fleeing cities and urban areas to escape the virus, crime and congestion.
Millions of workers also fled the labor pool — workers who are concentrated in the above-50 cohort. They do not plan to return. Generalized government figures blur the distortions of disfunction in local, national and global markets.
We have constructed a massive Rube Goldberg machine. If one component falters, reverberations are felt in many different sectors. Economists warned of “transitory hyper-inflation” at the outset. Costs in some sectors are up; other areas have stagnated.
The over-concentration of computer chip manufacturing outside the U.S. is a glaring weakness in our country and direct threat to our national security.
The Vernier Software & Technology group provides an example of Complex Rube Goldberg Machine
The appropriate remedy for StagFlation is for the FED to continue keeping money inexpensive — DO NOT raise interest rates. Trust the market. Rising prices in the auto industry will slow consumer demand. As beef prices increase, consumers will demand less beef.
Increasing the cost of borrowing only fuels additional inflation by making everything more expensive — including government and consumer debt.
Those who need cars will face even higher prices. Cost for home loans will increase. This pushes more people into apartments, which prevents them from building wealth, for example.
Most importantly, investment is needed. Our beef industry has too few processing plants. Higher interest rates discourage investment in more meat packing operations. Higher interest rates discourage investment in U.S.-made computer chips.
Inflation will cause consumers to “tighten their belts.” They will eat out less, for example, and spend more money in grocery stores as they eat at home. Restaurants will need fewer workers. Good. These additional workers need to be transitioned to factory workers who manufacture computer chips, for example.
This evolution will take years. Plants need to be constructed; management and workers need to be trained. Higher interest costs discourage investment.
This crash of the Rube Goldberg machine offers us an opportunity to bring more manufacturing BACK to the U.S. This is excellent for labor … as manufacturing jobs pay better than those in the service industry.
We will pay more for computer chips. Rather than $30, they may run $60. Not significant to a $1,200 smartphone or $30,000 car. Ultimately, that is better for America’s economy and national security. However, higher interests rates discourage change, while increasing prices.
INVEST now in a new America. Make America Great Again … Build Back Better — both Republicans and Democrats agree. Trump and Biden agree. We believe we are divided. Both sides are saying the same thing. We don’t need new Congressional spending. The $1.1T package can be directed appropriately.
Now is the time for America to return to manufacturing here at home (MAGA) by Building Back Better (BBB) — low interest rates fuel investment. Higher rates discourage!
Men messed with the market in 1929; men and women are about to mess with the market today. Leave the market alone. Trust in the market. Invest in America now by not raising the prime and repair our complex economic Rube Goldberg machine.
Thank you for coming to my U.S. Monetary Policy TED Talk
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Brilliant commentary! Thank you.
Aloha Shaquina, thank you for joining the conversation.