Cogito Ergo Non Serviam
Fed Holds Rates Steady
The Fed held its Open Market Committee meeting Tuesday and yesterday, and they announced that US interest rates would stay steady in the 4.25-4.5% range for the Fed Funds Rate. The remarks in the press conference and in the press statements explain that the Fed does see two rate cuts before the end of the year. That would bring the Fed Funds Rate below 3.9%. At the same time, the central bankers on the committee believe that inflation will rise to 3% up from the anticipate 2.7%. Unemployment will rise to 4.5% up from 4.4%. GDP will decline from 1.7% in the March forecast to just 1.4% now. That is the definition of stagflation, and it is hard to beat.
"As long as we're seeing the kind of labor market that we have, and reasonably decent growth and inflation moving down, we feel like the right thing to do is to be where we are," Fed chair Jerome Powell said.
To be sure, these increases are not that big. It is also possible that the data are off a bit, and rounding errors have created a perception of mild stagflation where there really is none. Also the US economy has surprised just about everyone with its resilience in the last decade or so. That could mean that stagflation now will not be as bad, enduring or awful as it was under Presidents Carter and Reagan. There is no guarantee that this is so, however.
There is a genuine chance of a war with Iran, and if so, the price of oil likely will go up. That will be another huge drag on the economy in addition to the tariffs that may or may not be in force on any given day.
Then, the US is trying to deport many of its lower-skilled workers on the grounds they entered the US without the correct paperwork. While one can accept that such entry is not in the interests of the US, the idea that deportation is the correct punishment is stupid. It costs the US a lot of money to do, it creates civil rights problems and it has led to masked ICE agents violating laws right, left and center.
This journal would rather see them get their documents in order and have to pay a fine for their entry. A tax/fineof $10,000 or $20,000 taken from wages at a tolerable level over 10, 20 or 30 years would be vastly better. The worker gets to stay with any family and friends they have. The US gets to stop wasting money on enforcement with deportation in mind (very expensive), it gets more taxpayers, and it gets revenue from the fines. If there really are 12 million people in the US without the correct documentation, charging them $10,000 would result in income for the Treasury of $120 billion. The opportunity cost of deportation is ridiculous.
Axios reported "The Fed is holding off on policy shifts until it is clear whether an upsurge in inflation, or worsening in labor market conditions, represents the bigger economic threat."
Stagflation cannot be fought on two fronts. It is impossible to have policies that decrease inflation and unemployment at the same time. Higher rates of interest slow inflation but increase job loss. Lower rates do the opposite.
The last time the Fed had to make this choice, Chairman Paul Volcker opted to take out inflation first. This was in the days of Reaganism when moneyed interest were front and center for relief by Fed policy. And to be fair to Mr. Volcker, part of his decision was guided by the observation that inflation hits everyone while unemployment does not. While they have have suffered more, the unemployed were much fewer in number than those paying higher prices. Politically, it was easier to swallow nationwide.
So as the world awaits the war or not in Iran, the tariffs or not globally and anything else that might crop up in the news, doing nothing for now is probably the only prudent move.
© Copyright 2025 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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