These are the words we’ve come to expect and become accustomed to from the Fed Chair over the last … 18 months or so.
“Long way to go” to beat inflation; expect more fed rate hikes
Jerome Powell, [1]
Its safe to say that the common person has lost a lot of, if not all confidence in the powers that be, that govern monetary policy. You don’t need to wander to far to simply see the stress that people are going through. Everything simply costs more, money doesn’t go as far as it used to, and although prices might not be rising as quickly as they used to, they’re still going up.
And yet each and every heavy handed, ham fisted decision is always justified with, ‘there is a long way to go before we reach our goal.’
Pfft, whatever! I don’t think I’m going to be revolutionary when I say, inflation will come down, the question is how many people and businesses will it take with it when it does. After all, getting inflation down is one thing. Getting costs and life back to some semblance of pre-inflationary normal is going to take deflation, and that has the possibility to claim a few victims when it does.
So, despite the recent US Fed’s ‘pause’ … or ‘skip’, there are a stack of brains out there, telling all the rest of us, the pain is yet to come.
Let’s try to look at the situation from a few thousand feet and take a guess at what’s making things so scary.
A very sticky situation
Right or wrong, the federal reserve and other reserve banks find themselves in a precarious situation. Although reserve rates have been far higher in the past, the proportional impact is arguably higher today.
Regardless of what data you may or may not look at such as employment, unemployment claims, CPI, PPI … the stock market itself which has been playing chicken with the fed for about a year now, the first major tremors within the economy itself were when Silicon Valley, Signature and First Republic banks collapsed.
Overly simplifying the situation as I do here, the investments the banks had made were fundamentally underwater, and when depositors wanted their money back … the banks collapsed … nearly over night.
We’ll come back to that later, but elsewhere with the ‘economy’ still showing signs of strength, despite Manufacturing dropping, the unemployment rate rising with unemployment claims dropping (huh?), retail sales falling … there are some mixed signals amongst the noise, and it seems like someone isn’t throwing straight dice.
The pressure on the average person and business is still rising.
Related: Markets, Inflation, recessions & what Comes Next
The cost of Energy
When it came to the last print of the Core price Inflation report, I felt very confident as I said to myself ‘the print will come in lower than the previous month.’
Why? The cost of energy. Simply looking at the commodity price of crude oil, as well as taking note of the listed price at the pump, it had been somewhat stable and nowhere near some of the crazy highs we had to live through in the recent past.
But there is a fly in the ointment. A little mob called OPEC+. It might not be something you might notice, but each and every time the price of oil drops, you will hear the rumor’s about plans by the OPEC+ nations to cut production.
And each time production gets cut, a reduction in supply against a consistent demand, the price goes up. That price flows through among each and every industry and each organization passes the cost downhill to … you guessed it … you.
Related: Its time to Talk about Energy
The federal cash rate itself
The next major component that gets discussed is the cost of ‘shelter’ … ya know, mortgages, rent!
If getting hammered at the check-out isn’t bad enough, we’re at the stage where each and every rate hike to reduce to reduce inflation now inflates each and every variable mortgage out there.
The cause and effect is brutally simple. Each home owner with a mortgage is having more taken from them, just to keep the roof over their heads. For investors, where the vast majority might only collect 2-4% yield on a property per year, those investments are underwater … the mortgage holder is getting it twice each and every time someone in a suit tightens the screws to ‘help’ them.
Let’s not forget the renters. As lending standard tighten, rental demand & rates are going up.
Just remember … ‘expect more fed rate hikes’ … the hikes themselves are now part of the problem.
Related: Fixer-Uppers & Income after Retirement.
What can we expect next?
With the CPI now at 4.0% (June) from 4.9% (May) … and 18.3% drop month-to-month within a dropping trend, we should be able to breath a sigh of relief, right?
‘Expect more fed rate hikes’ …
The real question is why? For a group of suits who seem to only have one sausage fingered tool available to them, the solutions to the problem seem simple right.
Firstly, take control of your energy, stop being held hostage to a group of people who literally just want to keep the price up for themselves … especially when you have the means to do it yourself. Hell, just the economic impact from dropping the cost of energy, would nearly guarantee a ‘soft-landing.’
Secondly, back off on the mortgage holder, ease up on the renter. A reduction in the cost of shelter, would allow the regular person out there to pay off their credit card debt, spend more within the greater economy, in the words of Janet Yellen … ‘go off and buy new grills!’
But of course, this is just too simple right?
*sigh*, ‘Expect more fed rate hikes’.
What can we expect? As I said earlier the stock market has been playing chicken with the fed for nearly two years. At the worst, the markets rallied as we’d past the worst of the crisis, and we could look forward to ‘relaxed’ … ‘less restrictive’ policy. Rate rises, barely cause markets to flinch any longer as the inevitable pivot seems to draw ever nearer. Now the focus is on the signs of economic slowdown.
But the fed has been steadfast, never wavering from the mantra … ‘we have a long way to go … rates will remain high … expect more.’
Can they really afford to?
3 banks have already collapsed, and there are others that are wobbling. The average tax payer doesn’t have much left when it comes to what they can handle … many have already been cutting back, if not all together.
Personally, I hope behind closed doors that policy makers are praying for more positive reduction news and reporting, any excuse not to tighten the screws any further when there is so much coiled up tension out there that’s ready to snap at any moment.
But my bets are frankly on more ‘stupid’ at this point! Wait for people to exhale and tighten the ratchet again.
Commentators everywhere have been talking about recession. ‘it’ll be here in Q4’22, Q2’23, Q3’23 … it’ll be here in Q4’23 …’ and somehow the economy and people have managed to persevere … mostly by taking the second or third job, the side hustle after hours!
Will the fed trigger a recession?
If they keep making ridiculous 1-dimensional decisions as they have been … if they keep being as stubborn as they have been, then it’s pretty likely … and when it does, it’s gonna hurt everyone!
Related: Is the Inflation Bubble about to Pop?
