Today, we look at the latest on inflation and the Federal Reserve.
On Wednesday, the Federal Reserve announced they were making no changes to interest rates or their bond-buying program. This wasn’t a surprise to markets, but that didn’t stop stocks from posting big losses after the announcement.
What upset the stock market was not the lack of action on inflation, but that the Fed was moving up its timeline for hiking rates. Back in March, their forecast had no rate hikes until at least 2024. Now, Fed officials are indicating they will start pushing rates higher in 2023. This shift scared the stock market, which, as you know, hates change and wants rates as low as possible for as long as possible.
Why is the Fed pushing up the date for their next rate hike?
They have revised their expectations for economic growth and inflation significantly higher than their March forecast. GDP is now expected to grow at a 7.0% rate this year, with core PCE inflation (the Fed’s preferred measure of inflation) revised 1% higher to 3.4%.
I know what you’re wondering: If we’re going to see that level of inflation this year, why isn’t the Fed raising rates now?
The Fed still thinks the current spike in inflation will be temporary, and will return to its 2% target rate next year. Surprisingly, they still think that after we found out on Tuesday that the Producer Price Index posted its largest 12-month increase ever in May.
Kudos to the Fed for pushing up its rate hikes to 2023, but in my opinion, they are taking a big risk by not acting now. As I’ve said numerous times before, the money supply is growing faster than ever, and manufacturers can’t keep up with demand. With economic growth as strong as it is now, I don’t see the upside in keeping rates this low when there is so much to lose.
At a minimum, they should start tapering their bond purchases immediately. Once you have inflation, it can be harder to get rid of than bedbugs. Paul Volcker had to purposely cause a recession to get rid of inflation in the early 1980s—do we want that again?
It’s time for Fed Chairman Powell to lose the “What, me worry?” attitude, and remember that price stability should be the Fed’s primary responsibility.
Remember, the number one cause of recessions in the United States has always been bad Fed policy.