Exactly one week from today, the Federal Reserve Open Market Committee will meet to decide its latest interest rate. Establishing a new Fed Funds rate is one of the primary duties of the Fed and its chief methods of managing the nation's overall financial environment.
For nearly a year now, runaway inflation has been the primary concern of the Fed. And they have responded by tightening monetary conditions, including, but not limited to, raising interest rates. Most analysts on Wall Street expect that the Fed will raise rates by 75 basis points on Wednesday, putting the nation's short-term interest rate at better than 4 1/2%.
4 1/2%, that's quite a jump considering that we began this year with an interest rate at essentially zero.
You've undoubtedly heard that old Wall Street saw, "Inflation is too many dollars chasing too few goods." And that's a pretty good definition of what the Fed sees today. Using this rate-hiking strategy, the Fed follows an old, well-established method for curbing inflation stemming from excess liquidity.
There are too many dollars floating around in the system, and this is causing prices to inflate.
Today we'll quickly survey where those dollars might be. Our survey is far from exhaustive, but it will help make the Fed's case if we can see where those "excess" dollars are.
The Federal Reserve is the number one place where "excess" dollars come from. Since the 2008 Recession, the Fed has been pumping dollars into the financial system in a program known as Quantitative Easing. Over more than ten years, the Fed pumped trillions of dollars into the system.
Where does the Fed stand now? It is not putting dollars into the system; it's withdrawing funds. The Fed is not adding to inflation but cooling off inflation. In the past seven months, the Fed has reduced its balance sheet by $378 Billion.
So no "excess" dollars over at the fed. How about money market mutual funds? Here is a place where people like to "stash their cash." An excellent place to deposit funds and gain a little return. Are Money Funds acquiring a lot of new investments?
Actually, no. Money Fund investments are down $173 Billion over the last two quarters. No "excess" cash here.
How about personal savings? There must be a lot of money floating around in personal savings. Again no. Personal savings is the big loser. Since exploding to over $5.7 trillion just after the stimulus checks went out, Personal Savings currently stands at less than half a trillion. Five trillion dollars in personal savings are gone.
Here is the common sense answer to what's going on with our Economy. The average person is getting slammed. The cost of living has gone through the roof, and people must draw down on all their financial resources to make ends meet. While there may have been a problem of "excess dollars" following the stimulus payments, that problem is long gone.
Today monetary expansion is declining, and it's dropping rapidly.
Undoubtedly, the Fed's policies have contributed to this decline. Indeed, reducing the Fed's Balance Sheet and raising interest rates curb inflation.
However, there is a growing consensus that inflation is already moderating. Every significant measure of inflation, except rent inflation, was down last month. The nation's standard inflation rate has been down for four months to just 7.7%, from a high of 9.1% in June.
But it's not enough for Jerome Powell and his jolly bunch of rate hikers. The Chairman and the Fed want an end to inflation and end it right now.
But as anyone driving a fast car knows, slow and steady is best when applying the brakes. Otherwise, you're liable to find yourself hitting the windshield.
Overnight China reported a significant drop in that country's balance of trade for November. You may recall that China had a trade surplus of $85 billion in October, and the assumption was that November's trade balance would follow suit.
Not so, China's trade balance came in at less than $70 billion, fully $15 billion below October. This trade decline indicates how severe China's current Covid lockdowns have been. Additionally, this slowdown in China does not bode well for the rest of the Global Economy, which looks to China as its manufacturing hub.
Just released has been the latest 30-year Mortgage Interest Rate. The rate came in at 6.41% interest. That's nearly 3/4ers% lower than the beginning of November's mortgage rate, another indication that inflation is slowing.
Crude oil reserves declined by about 5mm barrels. Remember, our Strategic Petroleum is near empty right now, so this will be something to watch as the winter progresses.