On Life Support

16 June 2022


Cogito Ergo Non Serviam

Fed Raises Rates 0.75%


The Federal Reserve, in an effort to halt the inflation affecting the US, has raised interest rates by 0.75%, the largest increase since the 1990s. The critics have stated that the Fed was slow to act against this wave of price increases, and looking at the Fed\'s own predictions, the central bank may well have underestimated the gravity of the problem. At the same time, this journal believes that inflation is always preferable to recession or depression, and the Fed was right in letting inflation run a bit before acting to ensure there was no economic collapse. After all, the world was coming off a global economic shut-down to prevent Covid deaths. And above all, the current interest rate increases are merely returning the interest rate and debt markets to historical norms, ending the last 14 years of aberrantly low rates.

Steve Rattner, an economic analyst and the guy who manages Mike Bloomberg\'s billions, wrote yesterday on his blog, "The Fed has yet to evince a full grip on this reality. Its most recent economic forecast, issued in March, predicted that inflation would moderate substantially in 2022 even as the Fed’s benchmark interest rate -- currently at 0.75 percent to 1 percent -- would remain below 2 percent and unemployment would drop to 3.5 percent.

"That scenario runs counter to both history and theory. Far more substantial interest rate increases have always been necessary to restrain fast rising prices."

Mr. Rattner, and a great many others, fault the US government for pumping far too much cash into the economy to prevent a Covid-based economic meltdown. This journal agrees that there is too much liquidity, but the blame lies with the US government\'s idiotic tax cuts foisted on the nation by Donald Trump. A trillion-dollar tax cut during an economic expansion can only be described as the completely wrong policy. There was too much money in the economy before Covid, and most of it was in the hands of people who already had millions and billions.

Wringing inflation out of the economy is necessary, and that means higher interest rates to slow both corporate and personal spending. The cause of the current inflation, however, is not simply due to too much money in the system. There is a war in Ukraine that is artificially but genuinely reducing the amount of grains and oils reaching the supermarket shelves all over the world. Changing interest rates will not affect that. Moreover, much of the exports China used to put into the global economy are adversely affected by President Xi\'s zero-Covid policy and China\'s barely adequate vaccines against Covid.

Predictions about when things will get back to normal are problematic because whatever normal used to be is gone. The new era is going to include higher interest rates, modest inflation and greater unemployment (the current 3.6% unemployment rate is probably unsustainable). The statistics today appear to be trending toward where they were after the Reagan Recession of 1981-82. That means GDP growth above 3%, inflation of 4% (the lowest it reached under Mr. Reagan) and unemployment of 5.4% (also the lower during his tenure).

The challenge for the Fed is to bring inflation down without driving up unemployment beyond about 6%. There is every chance the central bank will overshoot its target. The economy does not turn on a dime. Success will not be terribly exciting with those parameters, and it may have people longing for the good old days of 2021.

One must get used to the idea that the Covid crisis has changed the economy. That means borrowing will have real costs. Among those costs will be jobs. It also means savers may finally get paid for their thrift. That used to be a virtue, and it may become one again.

© Copyright 2022 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent. Produced using Ubuntu Linux.

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