Sounding like a broken record, the markets continue to convulse over the threat of inflation and the interest rate increases the Federal Reserve is implementing to harness it.
Raising interest rates by .75% yet again last week, this is the first time in history three .75% increases have occurred in a row. Historically, three increases in rapid succession have caused markets to crater and has given rise to the “three steps and a stumble” adage.
Federal Reserve (FED) Chief Jerome Powell, besides jacking the interest rate again, also had some fairly hawkish statements about future actions by the FED to address the inflationary fires that continue to scorch consumer pocketbooks.
Powell indicated he is not going to back off the economic brakes even if it means breaking the back of the American consumer by reducing credit and withdrawing money from the economic system.
This all translates to the ugly truth that Powell must in a sense destroy the economy to save it.
One could liken it to a bad tasting medicine to cure a sickness, but what the FED has to do is more like chemo.
Yes, it’s likely to be that bad.
As an analyst that has been studying economics since the early 1970’s, I have witnessed many things. I must admit, there is very little I see in this whole inflation thing that gives me much solace.
Caught in a predicament mostly of their own making, the inflation were seeing today is the result of massive government deficit spending for the last 7 decades. In the last 3 years the spending has been particularly zealous. CoVid shutdowns didn’t help the supply side of things either.
That fact remains you can’t just print up trillions of paper dollars and hand them out willy-nilly and not cause inflation. And the more you do it, the higher inflation goes.
Currency created inflation is like a camp fire. Printing up money might keep the economy warm, just don’t let it get out of control or there’s hell to pay.
Well, welcome to hell.
Now the FED must crush consumer demand to stamp out rising prices. Crush demand and you crush inflation. Crushing demand however means crushing the consumer. Unfortunate but that’s what needs to be done. And it’s the lower income strata that will suffer the most as they live on the edge of affordability.
Congresswoman Elizabeth Warren is accusing Fed Chief Powell of willingly and unnecessarily putting thousands out of work and driving many more into economic hardship through his actions.
Well, unfortunately, that’s the point. Powell has to do exactly that to quell inflation and many elected officials like Warren don’t understand that.
What Powell knows that Warren and others like her don’t understand is that the hardship caused by inflation would cause much more harm if left unattended compared to the pain Powell will inflict with the economic tightening he has now undertaken. Bad inflation decimates whole swaths of the economy and can lead to a wholesale collapse of the underlying currency, something that has to avoided at all costs.
With Powell and Warren at odds about how to solve the whole mess, here lies the predicament.
Powell has to keep the pedal to the metal and the fire to the feet of the consumer to do his job. Meanwhile Warren and Washington will likely put more and more heat on Powell to stop as the economic pain worsens for everyday Americans.
In my opinion, the amount of demand destruction Powell must undertake due to the severity of the inflation will be significant, meaning the consumer pain will likely be very severe.
Should pressure from Warren and her Washington constituents rise to the point of a Powell capitulation and a return to the ultra-low interest rates of the last 25 years or so, or worse yet a Powell firing, Washington printing presses will once again be put on overdrive.
If that happens, if you think inflation is bad now, you just wait.
Should the Feds not be allowed to complete their unfortunate mission of having to smash the U.S. economy, not only will the current inflation continue, the copious amounts of money Washington will print up in an attempt to repair the damage that Powell caused will be like pouring gasoline on an already out of control campfire.
“Watching the markets so you don’t have to”
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This article expresses the opinion of Marc Cuniberti and is not meant as investment advice, or a recommendation to buy or sell any securities, nor represents the opinion of any bank, investment firm or RIA, nor this media outlet, its staff, members or underwriters. Dividends can be cut or eliminated at any time and do not guarantee against losses. Mr. Cuniberti holds a B.A. in Economics with honors, 1979, SDSU, and California Insurance License #0L34249. His website is moneymanagementradio.com, and was recently voted Best Financial Advisor in Nevada County. 530-559-1214