May 2, 2022

Take Two Interest Rate Hikes. And Call Me In The Morning.

The big event this week is the meeting of Doctor Fed. That's right the Federal Reserve's Open Market Committee meets tomorrow and Wednesday. And thus begins the process of setting a new monetary policy for this country.

Now, “Monetary Policy” is an arcane way of saying that the Federal Reserve Bank, is standing by to adjust the current short-term interest rate. And this is all in line with the Fed's twin mandate of promoting full employment and stable prices.

The employment part of the equation is no problem at the moment. Right now unemployment in the country stands at only 3.6%. One of the lowest rates in years. And a clear indication that just about anyone who wants a job, can likely get a job.

No, the real problem lies with the other Fed Mandate: Stable Prices. Here, we've really gotten off the tracks. We are suffering through the worst bout of inflation, since the 1980s. Nearly 40 years since we've seen prices rise like they are right now.

And many are now turning to the Fed to solve this problem. If the Fed will just reach into their bag of tricks. Or so the thinking goes. Then they will come up with the solution to our economic woes. Inflation will go away. if the Fed just raises interest rates enough.

Or so the thinking goes.

This particular delusion is especially strong among the denizens at Broad and Wall, as well as the resident down at 1600 Pennsylvania Avenue.

I'm afraid however that this particular hope-um is pure delusion.

And the reason we know that this is a delusion was all in that gosh-awful GDP report last Thursday.

Wall Street and Washington are deluded into believing that the economy is fundamentally sound. They think it's just a little over-heated. That people are still spending those stimulus checks. But otherwise, this economy is just doing fine.

In short, the elites in this country believe that what we have is a demand issue. Cooldown the consumers and all will be well.

But nothing could be further from our current reality.

We don't have to rein in the consumer. The average American is struggling right now. Discretionary consumer spending is going full negative. As every extra dollar is being spent just to keep food on the table, and gas in the car. And as for those stimulus checks, they've been spent months ago.

Our current issues, as we pointed out last week, are the many shortages we face.

Currently, we're caught in an economic vice. On the one hand, we, as a country don't produce enough.

While on the other hand, we're not receiving sufficient imports to replace our own lack of production.

It's a real one-two punch.

And it's all spelled out in that GDP Report.

The report spells out three areas of production failure. First a decrease in inventories. Primarily cars. And these because we can't secure sufficient numbers of off-shore semiconductors.

Second a decrease in exports. Primarily durable goods to export to others.

This leads to problem number three. We have to import more and more durable goods because we simply don't produce them here at home. It's a very vicious circle.

And that dear friends are the crux of our problem. Lack of production.

Something that the Fed can do nothing about.

So come Wednesday afternoon, when Chairman Powell climbs his virtual podium to announce the latest rate hike. Wall Street will swoon and Washington will cheer both believing that something momentous has occurred.

But not this time I'm afraid.

This time the path to a healthier economy lies neither on Pennsylvania Avenue nor on Wall Street. Rather it lies in the plants and factories of America.