Federal Reserve Announces Largest Interest Rate Hike in Over 20 Years in Effort to Tame Inflation - What Does It Mean?

I am as concerned about inflation as I am concerned about traditional ‘rules-of-thumb’ being injudiciously applied to counter it.

I spent most of my working career on new technology used to solve problems that normal and broadly applied design practices could not. The design of things which have a lot of history rely on numerous rules-of-thumb based on years of empirical evidence, such as applicable safety factors and a lot ‘if you see this, do that’ kind of short-cuts. These are extremely useful and accurate design tools for ‘normal’ issues arising from ‘normal’ conditions. When these empirically based tools are injudiciously applied to designs for new applications or to address issues that are not ‘normal’ the resulting product can be inadequate or even catastrophically fail.

I worked with people deeply grounded in first principals of physics and engineering science to address and resolve these issues. Collectively there were many new patents, new products, new businesses, broadly accepted and widely applied new design methodologies, even new graduate level engineering text books developed which have had a quantifiably large economic beneficial impact. Something I am very proud to have been part of.

I bring this up only because it illustrates the issues that can arise when applying ‘normal’ rules-of-thumb to situations that are not ‘normal’ and I am certain that most of us could cite instances where this is true.

Common sense often is wrong when applied to correct problems which arise from situations which are not ‘common’. 

In this instance, our economy is currently thriving but limited due to extreme imbalances in supply and demand which are driven by extremely abnormal conditions, it could be a catastrophic error to simply react by applying ‘normal’ or even common sense corrections. 

Nobel prize winning economists and academic economic theorists, all of whom address economic issues from a ‘first principals’ basis and not just from a conventional rules-of-thumb basis, are warning of over-reacting to the imbalanced supply and demand which is driving inflation pressure and which should self-correct over time. 

Biden’s initiatives where all run past panels comprised of both day-to-day economists and academic economists who assessed that, while these policies would cause some accepted, even healthy, levels of inflation, they alone would not cause the levels of inflation seen today.

Since the inflation levels that we see in our country are the same levels seen worldwide, there must be other causative factors - causative factors that go far beyond anything that just our country or our administration is doing or has done.

In fact, the imbalances in supply and demand which is the root cause of all inflation are all due to prior and ongoing breakdowns of complex and interdependent international supply chains that most of the world depends upon. These supply chains were badly damaged by the pandemic and which were unprepared for the world-wide jump in demand as the worst of the pandemic seemed to have passed, and are taking time and effort to rebuild.

Profiteering by mega corporations or aligned industry groups with little free-market economy competitive pricing pressures have taken advantage as well- as evidenced by their record setting profits.

The pandemic has damaged and is still severely damaging complex, interdependent and interconnected supply chains with China’s pandemic lockdown of five million people and major shopping port city closures. This greatly limits global supply of manufactured products, most of which the unregulated free market market economy has outsourced to China. Also, the Covid closure of one of the world’s largest shipping ports, Shanghai, is preventing even already manufactured products from even getting into the supply chains. 

On top of all of this we have the putin’s war which, by necessity requires the ally’s to limit Russia’s access to the funding needed to sustain his war and the threat to other sovereign nations that the putin represents. This, the wanton execution of civilians, destruction of Ukrainian infrastructure and drive to permanently deny Ukrainian access to shipping ports will also contribute to inflated food price increases as Ukraine has been the world’s second largest exporter of wheat and one that many other counties depend upon.

The expansionist threat and unprovoked aggression against a sovereign neighboring country that the putin has embarked upon is a direct threat to the rules, treaties, agreements and norms that have governed and have mostly maintained world order since the Second World War; norms that have encouraged international trade relations, even with political adversaries, to be developed and the world economy to flourish. The allied sanctions are an absolute necessity to stop the putin even though they contribute to some of inflated fuel prices (along with profiteering by cartel linked oil producers), so that other aggressor nations will be deterred from destabilizing the world economies in like manner.

The point of all of this is that little to none of the current inflationary pressures are related to or driven by anything that our country is solely doing nor any of our economic policies. The bulk of our inflation is not a meaningful systemic artifact of any aspect of US economic policy. This inflation is certainly damaging to individuals some of whom certainly need support, but the sources of the large inflationary pressures globally are not ‘normal’, are actually quite literally temporary and will globally subside when allied support of Ukraine is successful in stopping the putin. 

Efforts to control our inflation using only the ‘cook-book’ rules designed to address US economy induced inflation are unlikely to make much difference and runs the risk of unnecessarily pushing our economy into a difficult recession. 

interest rate control is 1 of many tools needed to address inflation that has been 2 decades and several administrations in the making. 

A panel of economic and financial experts on core causes of current inflation identifies several factors occurring over decades ispanning multiple administrations.

Key Drivers include:

1) Federal Reserve holding interest rates low for decades and purchases of treasury bonds and mortgage-backed securities

2) Global supply chain disruptions still ongoing with China lockdowns

3) Aging population couple with Covid leading to the Great Resignation and many retiring early during Covid

Responses

1) Federal Reserve raised fed funds rate by half a point to 0.75%-1% during its May 2022 meeting, the 2nd consecutive rate hike and the biggest rise in borrowing costs since 2000, and is planning hikes in the next couple of meetings. 

2) Federal Reserve reduces asset holdings on its $9 trillion balance sheet on June 1st. The plan will start with a monthly roll-off of $30 billion of Treasuries and $17.5 billion on mortgage-backed securities for 3 months and will then increase to $60 billion and $35 billion for mortgages per month. 

3) China competitiveness legislation needed so the US is not effected by events in China like COVID-related lockdowns disrupting supply chain 

Financial Expert Panel:

1) Sam Dixon, Managing Partner at Oxford Advisory Group, “The potential for an inflationary surge has existed for 2 decades. Interest rates are being held down incredibly low...therefore ‘easy money’ is being injected into the economy. It has been the supply chain issue that has received most of the headlines concerning inflation prior to the Ukraine war. That is not without some justification. Supply chain issues are making everyday goods harder to find which increases demand and prices. The present bout of inflation has many fathers. Any one of them alone might not have been enough to spur it, but a coincidental series of unfortunate events may have been too much for our long era of low inflation to survive.

2) Gina Sanchez, Chief Market Strategist at Lido Advisors, “While Inflation is a focus, the real fear of the markets is that the cost of capital is potentially about to begin to rise, letting the air out of the balloon that has been risk assets for the past two decades since 9/11 and the beginning of the great deluge of liquidity. For the past two decades, a combination of globalization, technological innovation and automation have conspired to drive down the costs of both goods (think commodities) and services (think wages) simultaneously, ushering in the greatest corporate margins in history. Combined with the cheapest cost of capital and greatest non-wartime fiscal stimulus in history as a result of 9/11, the Great Financial Crisis and the Pandemic, the rise in the valuations of everything from corporate equity to corporate debt to structures on top of corporate debt fed a wealth boom. The Covid lockdowns led to an unexpected response on the part of workers. Having tasted freedom, many decided not to return to work. This further exasperated the supply chain as companies found the human resources needed to meet demand scarce. The pandemic also forced global economic activity to take a pause, now dubbed ‘The Great Reflection’ which was followed by a collective shared unconsciousness leading workers to question their value in the markets relative to the risks, leading to the ‘Great Resignation’ and the ‘Great Retirement. Wages are now rising in real terms for the first time since the peak of wage growth in 1973. The fragilities of last mile logistics also proved faulty, causing companies to consider near shoring or on-shoring what used to be offshore activities like manufacturing or services support. These events have fundamentally shifted the narrative from deflation to inflation and to the fear that the Fed is about to set the US on a course to wring liquidity out of the markets.”

3) Doug Carey, President of WealthTrace in Zionsville, “They have purchased trillions of dollars of treasury bonds and mortgage-backed securities in order to keep interest rates low. In 2007 the Federal Reserve balance sheet stood at less than $1 trillion. Today it is nearly $9 trillion. The money they created to purchase these securities has found its way into various markets and consumers’ wallets. This was the first catalyst for inflation. Add to that record government stimulus and supply chain disruptions and now we have a perfect storm giving us the highest inflation rates in 40 years.”

4) Josh Curtis, Founder & CEO at EQB in Richmond, "Of course, if they had undershot, we’d be in the streets with pitch forks and torches. Turns out, there is no miracle monetary policy in the middle of a hundred-year public health crisis.”

5) Daniel Kern, Chief Investment Officer at TFC Financial,  “Spending on goods rose dramatically since the start of the pandemic, fueled by stimulus payments and demand from consumers trapped in their homes. Just-in-time inventory approaches and import infrastructures, particularly the inefficient ports of Los Angeles and Long Beach, couldn’t handle the increased demand,” says Kern. “Semiconductor shortages added to the upward pressure on new and used auto prices. Consequently, goods inflation rose dramatically. Goods spending continues to normalize, reducing some of the goods-related inflationary pressures. There is not much that Fed policy can do to ‘fix’ issues such as clogged supply chains and semiconductor shortages.. With the supply chain broken, it was impossible to keep up with the demand fueled by the ever-flowing dollars to a mostly idled workforce looking for things to do. There was only one direction prices could go. Wage inflation and labor participation will be key to the outlook for inflation and Fed policy. Wages have risen in response to an extremely tight labor market. About 5 million workers are out of the workforce because they need to care for children, more than 2 million have left the workforce because of Covid fears; retirements are more than 1.5 million above trend, and immigration is down to levels not seen since the 1980s. Lack of labor supply is a major underlying cause of the recent wage pressures, this is another factor in which the Fed is more bystander than driver.”

6) Nick Coleman, Financial Advisor at Bonfire Financial, Colorado Springs, “Spending on goods rose dramatically since the start of the pandemic, fueled by stimulus payments and demand from consumers trapped in their homes. the government stimulus ended up pumping nearly 6 trillion dollars into the US. What is occurring is a new influx of money and burning desire to spend money, and lack of supply. This raises the prices for common products, as well as items that are larger, high-ticket items, such as homes and cars. The lack of counter-inflationary fiscal policy on the part of the Fed (in part due to fears of deflation at the start of the pandemic) combined with consumer spending has acted like a one-two punch.”

7) Daniel M. Keady, TIAA’s Managing Director, Chief Financial Planning Strategist, "As we emerge from the pandemic, we currently have a high demand for goods, labor shortages and other supply chain issues spiking inflation. In addition, we have inflationary impact from accommodative fiscal and monetary policy used to rebound the economy from the pandemic.”

8) Marc Lichtenfeld, Chief Income Strategist at The Oxford Club, “There are many factors driving inflation. Demand is still strong coming out of the pandemic with low unemployment and higher wages. On the supply side, the supply chain is still fractured with issues in China and staff shortages in the U.S. What once was an operational imperative has since been exposed as an operational vulnerability. And it’s almost impossible to retool systems so they can turn on a dime. In short, we were stuck with the world we had built. 

9) Jon Lawton of OpenAir Advisers, “In 2021, supply chain disruptions drove inflation. Everyday purchases such as food, cars and energy have skyrocketed. Right now, used car sales are pushing inflation even higher. There aren’t enough semiconductors and chips available to make new cars. That backlog is due to the pandemic closing factories and disrupting shipping routes. Our reaction to Covid has become less and less, which is slowing down the abrupt nature of the economy and market reopening. The steady increase in wages may have also been fueled by a number of states raising their minimum wage requirements. All this bodes ill for those who feel inflation will ease anytime soon or that prices will return to previous levels. We’ve been blessed with low inflation over the past couple of decades,” says Lawton. “But inflation will be sticky as we head into 2022. I expect there will be continued disruptions and slowdowns over the next year, which will cause prices to go up. Buyers and sellers of certain goods will be reluctant to change their prices even if supply and demand says otherwise. The one metric to watch is wage inflation. The price of cars can go up and down but once you increase wages it’s more permanent.”

https://www.forbes.com/sites/chriscarosa/2022/03/16/whats-driving-inflation-and-is-it-sustainable/

https://tradingeconomics.com/united-states/interest-rate

it's going to help, but not much. BR i think it's a bit convenient and simple to just point a finger at the current President. Take a peek at this graph: https://tradingeconomics.com/united-states/money-supply-m2 going back to the 80s. Thru this period of time - my adult life basically - we have been growing the money supply exponentially and getting away with it. It has been one of the great economic mysteries of my life. How have we been getting away with it? I think i understand a few of the factors, but basically i don't know. 

i guess what I'm saying is that it's been time to pay the Piper for a very long time. 

This raise is nothing compared to 1979 through the 80's. that was 13 to 15% to get a loan. 20 plus % on credit cards. A lot of American folks don't know how to save. $1.00 down and $1.00 a week just to keep up with the Jones. It shows because people are willing to pay hughe sums for a house, a car and it is requiring both parents to work just to keep their nose above water. A friend of mine works for an insurance comapny and he said the avergae person he talks with could not afford a $500.00 emergency expense. First you have to help yourself, Uncle sam will not be there if your need him.

The best part of this week's economic news is that the Federal government will begin to pay down the deficit for the first time since 2016. The disastrous tax cut of 2017 and the reckless spending of the previous administration have left us in more debt than in 2016, but it's finally turning around due to the current government. This is what happens when Democrats are in control: they pay down the debt and pass bills that benefit all Americans. I'm sure Senator Toomey and the GOP will find a way to spin this so they look responsible, but if you look at their track record, they are fiscally irresponsible every time they're in power.

In a rare moment of praise...

The Causes Lede did a good job in providing a background primer.

Thank you.

Macroeconmics is one area few are qualified to hold a legitimate opinion, especially most politicians. Too many politicians use economic circumstances to score points with a populace that is utterly clueless. What politicians usually offer is equally clueless.

For obvious reasons economic models are harder to devise than even weather models.

So, do I think the Fed "Knows" what its doing is going to help? Of course not! But should it use the best theory available, apply it, see the results and tweak things. Sure. 

Here's an article that might help some get a little better handle on things:

Explaining the inflation puzzle
https://www.brookings.edu/product/explaining-the-inflation-puzzle/

"...Today, the Phillips Curve is a cornerstone of models that economists at the Fed and elsewhere use. Monetary policy’s ability to influence and stabilize inflation hinges on a link between prices and economic activity."

While this maybe the largest interest rate hike in over 20 years, it alone will not have much of an impact on taming inflation. To make matters worse, this administration is oblivious and has no plans. It is scary  how out of touch Biden's administration is and has been.  

Our current inflation is not due to an "overheating" economy.  It is the result of supply chain problems and price-gouging.  This interest rate hike will do nothing but hurt the poorest among us.

No the fed is a private mucking company and is easily swayed to keep dishing out massive amounts so the rich can get richer and throw their loans back into buying their own stock to please the shareholders. It's criminal, completely corrupt and full of bs!

Joe Biden and the democrats policies have caused the inflation tidal wave. Raising interest rates will add to the problems!

High infation hurts so many.

Corporations need to ease up on their TENDER LOVING GREED.

Before the Fed's effort can work Congress will have to stop spending money we have to borrow. Energy policies created with the Biden Presidency will have to be reversed to lower production hurdles.

President Biden will be a one term President based on results from decisions and actions he took in his first week in Office. It is poetic justice but unfortunately all of us are suffering from these decisions.

The only way to stop inflation is for the administration to change its domestic energy policies.  We can't dig our way out of this by claiming wind/solar energy will fix this because it won't and blaming Putin and Trump won't fix it either. The sanctions aren't hurting Putin, they are hurting us. 

Joe Biden gave a speech today promoting his administration’s efforts to curb inflation. He identified supply chain bottlenecks brought on by the pandemic and Putin’s invasion of Ukraine as the main drivers of inflation, and called on Congress to pass policies from the Build Back Better plan, like lowering child care costs and extending the expanded Child Tax Credit, to help families weather higher costs.

Now, none of this is necessarily wrong. But Biden left out one of the key drivers of inflation: the increasing concentration of the American economy into the hands of a relative few corporate giants with the power to raise prices.

If markets were competitive, companies would keep their prices down in order to prevent competitors from grabbing away customers. But they’re raising prices even as they rake in record profits. How can this be? The answer is they have so much market power they can raise prices with impunity.

Corporations are using the excuse of inflation to raise prices and make fatter profits. Don’t believe me? Listen to the corporate executives themselves. CEO of Tyson Foods, one of the four companies that dominate the meat processing industry, said the company is asking customers to “pay for inflation.” That strategy is paying off: Tyson posted $1 billion in profits in the first quarter of 2022, and corporate profits are at a 70-year high.

Are corporations using these record profits to lower prices for consumers? No. They’re using them to buy back shares of their own stock at record rates. Goldman Sachs expects corporations to buy back $1 trillion in stock this year. That amounts to a direct upward transfer of wealth right from your pockets to CEOs’ and shareholders’ wallets.

The remedy for this is multi-pronged. First, tougher antitrust enforcement to address corporate concentration. Next, a windfall profits tax that redistributes corporations’ record profits to everyday Americans struggling to cover soaring costs. Lastly, price controls to prevent corporations from taking advantage of a crisis to jack up prices with impunity.

Biden is making a crucial mistake by not addressing how corporate power is helping drive inflation. Know the truth, and spread the word.

RR

We are caught between supply chain issues and corporate greed. There is no reason for CEOs to be receiving record-high compensation at a time when people around the world are struggling to feed their families and goods and supplies are stuck on ships sitting out in the middle of the ocean because ports cannot accommodate them due to lack of personnel. Raising interest rates, which then costs families even more for mortgages and loans they need to keep themselves going, becomes more like a tax on the poor and middle class. Start fining corporations who are raising prices at a time when families are struggling to make ends meet. Cut taxes on gasoline at the pump so people don't have to choose between filling the tank and buying food.

Joe has destroyed the US economy. Guess thats what you get from a fake president

How do you spell recession? Thanks Dems 

There is a small chance this will slow inflation but not stop it. The ONLY way to stop this to stop printing currency that's not supported by a healthy economy. The UNITED STATES GDP is weak, and this administration, backed by the liberals, continues to want more money for this BBB. It's quite obvious that they have no other objective than to destroy our nation.

That's the accepted wisdom, that raising interest rates will cool demand and cool inflation. However, I think it's a silly question to ask what the public 'thinks' will happen. The vast majority of the public is uneducation in macro-economic theory and practice and so really has no idea what will happen. Any guessing on our part is just that, a guess. It's up to those with more knowledge and experience to EDUCATE the public and dispel the false narratives that undoubtedly will arise. 

we need to teach americans about how the federal reserve works

This  Biden ADM has NO idea what HELL they are doing, they are too show to react, the Biden Economy is Falling Apart remember the 1970s if not you will, it is right in your FACE, GOOD OLD JOE...

It may help, but will it stop price gauging? 

Corporate greed, lack of anti trust laws, supply chain issues and a paucity of immigrants to work jobs Americans are unwilling to work are the root causes to the high inflation we currently have. The russiapublican party has no answers except to support the corporate greed and complain. Vote them all out!

My legislators need to address the price goughing and profiterring of Big Oil and other corporations.

Let the economic experts do their job to fix this problem. The political people need to work together for the betterment of the country because this effects every home and business. I'm getting tired of the Political Party's not being able to find middle ground. Let's try something radical "country first"! This country has the best and brightest people that can fix this economy. Or is this just wishful thinking?

Too little too late....... this administration is in over its head

Go Chairman Powell!

Show us your Volker.