It’s been a while since I’ve posted to this blog, but there are some things going on in the economy that are driving me crazy lately. Firstly the Fed…
It’s hard for me to understand how some of these Fed officials have no idea what they’re doing.
I wasn’t a fan of Bernanke – he was extremely slow to react to the data in the market – he preferred to look at data that was months to quarters old for some reason. I remember watching Jim Cramer have his meltdown on tv in August 2007, and he was absolutely right. The Fed should have been moving rates, they were missing clear opportunities at meetings and then they had to have surprise moves in between meetings which were bigger than they would have been if they’d just moved at the right time.
Yellen is even more clueless – she had the same slow response to anything, but was chair during a fairly uneventful time – the stock market itself was inching up steadily, to the surprise of many, and yet inflation was low and required little from the Fed. Her huge mistake was, of course, after her tenure as chair, when she was Secretary of Treasury. Calling inflation “transitory” was just colossal ignorance. It’s basic Econ 101 that if you create more of anything, the law of supply and demand says the value of that thing should decrease. In this case that thing is the dollar. The decision to print trillions of dollars and the complete surprise from these morons that such a move would decrease its value (inflation) blows my mind. I kind of expect it from some of the lawmakers responsible, but a Fed chair should have seen that coming.
Finally, Powell – basically a protégé of Yellen – still slow to react to anything, not sure what he was thinking in response to the inflation we faced in the early part of this decade. Even when it was obvious to everyone that they were going to have to raise rates, they wouldn’t do it – they’d say they would wait for the next meeting, or if it was clear that rate should be 75 basis points higher, they’d do it 25 at time over 3 (or 6) meetings, instead of just taking care of it. This ultimately lead to rates going higher than they really needed to, and staying high much, much longer than they needed to, or than anyone could have predicted.
Now, with rates still elevated and inflation having come in tremendously from its high, these people are split on whether to raise, lower or hold rates. And this is where I think they really don’t understand what they’re doing. The whole purpose of raising rates when there’s inflation is to slow down the economy by making money more expensive to borrow – therefore making investing in businesses more expensive and thus slowing growth.
The main causes of inflation recently, though, aren’t a raging economy. And the Fed, and economists, and most people who follow the market know this. It’s ingrained in some people, who aren’t thinking and just like to have rules of thumb, that when there’s inflation the Fed must raise rates. But when the higher prices are coming from tariffs, what does raising rates accomplish? Nothing, it just squeezes companies with higher import costs even further. It’s actually making a tough situation for them even tougher. Raising rates does nothing to lower tariffs.
And the same thing goes for higher oil prices, currently as a result of the war with Iran. Raising rates just squeezes companies already experiencing higher transportation costs even more, and does nothing to solve the actual problem.
In fact I think both actually really risk causing a recession by squeezing companies too much – they can’t absorb the higher capital costs and tariff costs or transportation costs forever, so they’ll get to the point of considering cutting back on workers and/or limiting raises, meanwhile the workers have to face higher costs of goods while worrying about their jobs and income. That’s a perfect setup for an economic disaster.
I hope the Fed and its members really think about exactly what it is they’re supposed to be doing, and realize the limitations of what their policies can accomplish.
-DD
