The below graph was taken from my friend FRED at the St Louis Fed. It plots monthly inflation rates (the percentage change in the Consumer Price Index) starting around 1950. It is an ugly graph because it crams so much information into one small space. I won't discuss any of the data points but will ask you to look at this graph and decide if inflation seems to be a big problem. Or does it look like inflation is accelerating in a dangerous way?
Aside from making me happy, why do such harm to your aging eyes? Because all the crapola I am reading these days says that the Fed must raise interest rates to head off an impending disastrous bout of ghastly inflation. Interesting dilemma -- the Fed's policy to head off inflation seems more upsetting to our economy than the actual inflation. Its like buying an automatic weapon to keep your neighbor out of your backyard and then shooting yourself in the foot.
There's nothing wrong with the Fed wanting to raise interest rates to restore normalcy to rates. There is also nothing wrong with trying to lose weight. But that doesn't mean you go on a diet right after a major medical procedure. Give yourself a few days to recover -- then go on the diet.
I wrote a brilliant piece for this blog back on June 16, 2015. In the post I made the point that most recessions followed after the Fed tightened policy and raised rates following increases in the inflation rate. So it is not silly to wonder what will happen if the Fed continues on this path of fighting an inflation acceleration that isn't even there.
One more point. President Trump criticized the Fed but for the wrong reasons. If the Fed is the golfer with no short game then Trump is the golfer who hits the ball a very long way but one cannot predict on which fairway it will land. If Trump thinks the main reasons the stock market is tanking has to do with minuscule increases in the Federal Funds Rate then he is truly ignorant of economics.
I hope you got everything you wanted for Christmas.
Wednesday, December 26, 2018
Wednesday, December 19, 2018
First, this blog is still not fully ready to go again but I just couldn’t help myself today. Today the Fed raised interest rates as planned and the stock markets went bananas. Does it make sense that the market would fall apart when the Fed raised interest another smidge?
My answer is no.
First, we have known since the ice age that the Fed was going to raise rates in December. If markets are so smart and forward leaning—why did the market swoon today?
Second, except for banks no one really cares about the rate they raised—it is called The Federal Funds Rate (FFR). Go to your local bank and ask them to let you borrow money at the FFR. Be ready for roaring laughter.
Third, what matters is what happens to interest rates that you, me, and your local steel mill pay when they borrow. I hate to tell you this but most of those rates have been falling lately – not rising. Yup, the FFR went up but critical interest rates are low.
Fourth, we might feel sorry for banks if their cost of funds (FFR) goes up but mortgage rates do not go up and their revenues and profits decline. But they can’t really do much about it since they have no real power today to raise rates. The markets won’t allow it.
Fifth, what matters to the stock market and to most of us is the strength of the economy. The economy is strong now. I won’t go into all the data because you read about it all the time. Output, employment, wages…they are all strong. Yes, there are many risks to the growth but so far, they are risks and not realities.
Sixth what also matters is inflation. We don’t want it to come roaring back. Will it? Hardly. Check out energy markets lately. I bought gas yesterday. Wow! I love it. The world economy – Germany, France, Japan, China – all these countries are experiencing slower economic growth. This is not the kind of time when inflation soars. If inflation fails to soar – there is no reason for the Fed to raise interest rates anyway.
The markets swooned. But there is nothing to swoon about. The Fed can want to raise rates but in today’s global environment the December policy is about as important as a snow shovel in Tucson in June.
Big Question -- will markets get smarter or dumber?
Hope you have a Christmas and New Year.
Posted by Larry Davidson at 5:45 PM