Fed Chair Powell pushes the economy over the cliff. Next stop: Stagflation

WASHINGTON (AP) — Intensifying its fight against high inflation, the Federal Reserve raised its key interest rate Wednesday by a substantial three-quarters of a point for a third straight time and signaled more large rate hikes to come — an aggressive pace that will heighten the risk of an eventual recession.

Barring the kind of miracle that allows Jerome Powell to come to his senses, we very soon will be in a stagflation — a combination of stagnation and inflation — and Jerome Powell will not know what to do about it.

The past interest rate increases have done nothing to halt or even moderate inflation. So, Chairman Powell does the only “sensible” thing. He keeps doing what repeatedly has failed, praying that somehow, in some way, magic will happen.

He is not “heightening the risk of recession.” He intentionally is causing a recession. He says so himself but uses oblique language to describe it.

Trust me. I’m doing this to cure your acrophobia.

The officials also forecast that they will further raise their benchmark rate to roughly 4.4% by year’s end, a full point higher than they had envisioned as recently as June.

And they expect to raise the rate again next year, to about 4.6%. That would be the highest level since 2007.

By raising borrowing rates, the Fed makes it costlier to take out a mortgage or an auto or business loan.

Get it? To fight higher prices, the Fed will raise the prices of mortgages, autos, and business operations — and just about every other thing you wish to buy.

And some people believe this nonsense.

Consumers and businesses then presumably borrow and spend less, cooling the economy and slowing inflation.

“Cooling the economy” is the Fed’s way of saying, “causing a recession.”

Here is the definition of a recession: “a period of temporary economic decline during which trade and industrial activity are reduced, generally identified by a fall in GDP in two successive quarters.”

Sounds like “cooling,” doesn’t it?

Sadly, the Fed doesn’t have the courage or morals to tell the truth, which is that they want to cause a recession as a way to end inflation. So they say they are going to “cool” the economy”

What makes them feel the economy needs “cooling”?

One measure of the economy’s “heat” is unemployment. A “hot” economy should have low unemployment. According to the Fed’s metric, the Fed should raise interest rates when unemployment goes down.

Similarly, when unemployment rises, you might expect the Fed to cut rates We should see the unemployment rate and the interest rate move in opposite directions.

Is that what we see?

When unemployment (red) goes up, and the economy could use some stimulus, the Fed tends to raise interest rates (green), which is anti-stimulus. By the Fed’s own philosophy, interest rates should rise when unemployment goes down, But we see the opposite.

In short, the Fed is consistent. It consistently does exactly the opposite of what it claims the economy needs. The reason: The Fed focuses on the false premise that inflation is caused by low interest rates and is cured by raising interest rates.

And as far as the economy needing “cooling,” what exactly does it mean? What does it mean for an economy to be too hot?

Here’s an interesting graph:

It shows one of the prime measures of economic growth, the annual change in real per capita gross domestic product. If anything should measure the “heat” of an economy, this is it.

A year ago, in early 2021, one might have said the economy is pretty “hot.” No longer. The economy now seems to be growing at a normal rate. So why does it need “cooling”?

Notice what happens before we have a recession. The annual change drops, which is exactly what the Fed wants to happen now.

I’ve been at this for twenty-five years, and I still don’t know what it means for an economy to be too hot. What I do know, however, is what causes inflation: Shortages of key goods and services.

Today, we have those shortages, not because demand is too great, and not because interest rates are too low, and not because the federal deficits are too high. We have shortages because the confluence of COVID, the Russian war, and reduced oil pumping caused supply to constrict.

 

Falling gas prices have slightly lowered headline inflation, which was a still-painful 8.3% in August compared with a year earlier.

Think of it. The Fed has raised the benchmark interest rate almost 4 points — a massive change — and inflation didn’t budge, but falling gas prices moved the needle. That tells you something about the ineffectiveness of interest rate changes.

Here’s another interesting graph. It compares inflation to oil prices:

The parallels are stunning. Inflation follows oil prices because oil affects the price of every other product. The price of oil is determined by supply and demand. Increase the supply, and inflation will go down.

The same is true regarding demand. Decrease the demand for oil, and inflation will fall. But short of causing a recession, how does one decrease the demand for oil? The only answer is something we are just beginning to do: Find substitutes for oil. 

Most oil is used for energy, so businesses must expand production of solar, wind, nuclear, geothermal, and tidal energy sources — and this will require increased government spending and lower interest rates.

Speaking at a news conference, Chair Jerome Powell said that before Fed officials would consider halting their rate hikes, they would “want to be very confident that inflation is moving back down” to their 2% target.

He noted that the strength of the job market is fueling pay gains that are helping drive up inflation.

Powell, as an agent for the very rich, tells us that those nasty pay gains for the 99% are causing inflation. If only we could find a way to cut back on pay gains, all would be well.

“If we want to light the way to another period of a very strong labor market,” Powell said, “we have got to get inflation behind us. I wish there was painless way to do that. There isn’t.”

Translation: “The labor market is too strong. Unemployment is too low, and people are earning too much. So, I’m going to create a strong labor market by cutting economic growth. This will increase unemployment and cut salaries, which will be painful (to everyone but the rich).”

This is the logic that will help widen the Gap between the rich and the rest.

Fed officials have said they are seeking a “soft landing,” by which they would manage to slow growth enough to tame inflation but not so much as to trigger a recession.

Yet most economists are skeptical. They say they think the Fed’s steep rate hikes will lead, over time, to job cuts, rising unemployment and a full-blown recession late this year or early next year.

Job cuts, unemployment and a full-blown recession are exactly what the very rich want. Their incomes won’t be hurt. They won’t be fired. Their pay won’t be cut. And they’ll buy bonds paying higher interest.

Meanwhile, the working class will suffer, the Gap will widen, and all will be well with the world.

“No one knows whether this process will lead to a recession, or if so, how significant that recession would be,” Powell said at his news conference. “That’s going to depend on how quickly we bring down inflation.”

The way to bring down inflation is to cure the shortages that are causing inflation, not by causing a recession. The federal government needs to support farming, transportation, and the manufacturing and service industries.

One way: Cut business costs. Eliminate FICA and provide free health care insurance to every man, woman, and child in America. This would substantially reduce the cost of running businesses.

Eliminating FICA instantly would cut the prices of all goods and services. It’s a quick first step, easily done. Simply stop collecting the tax and have the government pay for Social Security and health care insurance.

In their updated economic forecasts, the Fed’s policymakers project that economic growth will remain weak for the next few years, with rising unemployment. They expect the jobless rate to reach 4.4% by the end of 2023, up from its current level of 3.7%.

This is the cure for inflation?? Weak economic growth and rising unemployment for years??? Some might say the cure is worse than the disease. That’s the best the Fed can do?

Historically, economists say, any time unemployment has risen by a half-point over several months, a recession has always followed.
Fed officials now foresee the economy expanding just 0.2% this year, sharply lower than their forecast of 1.7% growth just three months ago. And they envision sluggish growth below 2% from 2023 through 2025.

That gloomy forecast seems about right based on the reluctance to increase federal deficit spending and the plan to repeatedly increase interest rates.

Even with the steep rate hikes the Fed foresees, it still expects core inflation — which excludes the volatile food and gas categories — to be 3.1% at the end of next year, well above its 2% target.

Translation: “What we’re doing won’t help much, but it will hurt you, and most importantly, it will make you believe we’re doing something.

Powell acknowledged in a speech last month that the Fed’s moves will “bring some pain” to households and businesses.

Pain to the working class but not the rich — that’s the goal.

Inflation now appears increasingly fueled by higher wages and by consumers’ steady desire to spend and less by the supply shortages that had bedeviled the economy during the pandemic recession.

Utter nonsense. Prices can’t rise without supply shortages. But yes, reducing the cost of labor will help reduce inflation. And that can be accomplished by eliminating FICA while providing health care insurance to everyone.

Some economists are beginning to express concern that the Fed’s rapid rate hikes — the fastest since the early 1980s — will cause more economic damage than necessary to tame inflation.Mike Konczal, an economist at the Roosevelt Institute, noted that the economy is already slowing and that wage increases — a key driver of inflation — are levelling off and by some measures even declining a bit.

Part of the problem is a false belief that some economic damage is necessary to tame inflation — the false belief that the medicine must be bitter.

Even at the Fed’s accelerated pace of rate hikes, some economists — and some Fed officials — argue that they have yet to raise rates to a level that would actually restrict borrowing and spending and slow growth.

Translation: “The purpose of raising interest rates is to restrict borrowing and spending and to slow growth, but that won’t work.”

Huh?

Many economists sound convinced that widespread layoffs will be necessary to slow rising prices.

Translation: “It’s all the fault of the working class. They are making too much money. We’ll have to starve them a bit to control inflation.”

Research published earlier this month under the auspices of the Brookings Institution concluded that unemployment might have to go as high as 7.5% to get inflation back to the Fed’s 2% target.

SUMMARY

Interest rate increases will not reduce inflation. They will cause stagflation, courtesy of the Fed, who will blame it on the working class making too much money. The Fed will not blame the very rich for making too much money. The Fed knows who their bosses are.

Rodger Malcolm Mitchell
Monetary Sovereignty

Twitter: @rodgermitchell Search #monetarysovereignty
Facebook: Rodger Malcolm Mitchell

MONETARY SOVEREIGNTY

7 thoughts on “Fed Chair Powell pushes the economy over the cliff. Next stop: Stagflation

  1. Well-said, Rodger. This is a classic “burn the village to save it” approach. The problem with that approach, however, is that sooner or later, the proverbial village will return the favor. And it won’t be pretty at all.

    Deliberately engineering a recession is the height of stupidity. They have already given up on a “soft landing”, and have admitted as much. Next stop, a Paul Volcker-style recession. And while their target rate of circa 4% is tame compared to Volcker’s 20% in the early 1980s, we must keep in mind that the economy has grown used to rock-bottom interest rates in the past decade or so, and Powell is also doing Quantitative Tightening at the same time as well, further amplifying the recessive effects of rate hikes.

    And those who bring up the “success” of Volcker’s approach back then ignore the Canadian experience. Canada did something similar and they ended up with a more protracted recession, persistently high unemployment, and persistent stagflation as well. Keeping rates too high for too long is *worse* for inflation than keeping them “too low”.

    Powell must be looking in the mirror, seeing Volcker staring back at him, and saying to himself, “Wow, this job is really aging me!” LOL

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  2. Only silver lining: put your money in CDs to lock in these high rates. Because when the economy crashes, they will have to cut rates once again.

    Of course, cutting rates is like pushing on a string in terms of stimulating the economy.

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  3. It seems one thing we can always count on is the FED searching for the elusive NAIRU like some obsessed cryptozoologist hunting for Big Foot or the Loch Ness monster. Meanwhile, we keep searching for signs of rational behavior and economic decision making in our government where none will ever exist. It’s all pretty frustrating and depressing.

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    1. When anything the government does seems illogical, the first step is to ask, “What would the very rich want?” The answer often can be found there. In this case, the rich want unemployment to be high. They also don’t mind high interest rates because they like interest-paying investments.

      Liked by 1 person

      1. Indeed. While Wall Street luuurrrves cheap/easy money and QE (for themselves, that is, not for We the People heaven forbid!), they also don’t mind high interest rates either, as they are not only insulated from the consequences, but they can actually profit from it as well.

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    2. NAIRU, as coined and defined by Milton Friedman, is about as cranky and junky as the closely-related Philips Curve. Inflation and unemployment need NOT be trade-offs with one another. Sometimes they go in opposite directions, but sometimes they go in the same direction. There is no iron law there at all.

      Also, the word NAIRU always makes me think of Nauru, the tiny island country with the world’s consistently highest unemployment rate of 90%. Coincidence? It’s almost like the collective unconscious is trying to tell us something….

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