Let's recall that about two and a half years ago the U.S Federal Reserve was still calling inflation transitory and claiming that price pressures would subside quickly as the onslaught of coronavirus decreased. Nearly all financial institutions could see the Fed was merely being stubborn, and that is a polite way of putting it, instead of being realistic.
It would be nice to give the Fed the benefit of the doubt now, and say the Fed have better information and know how to quantify the outlook of the U.S economy in a more dynamic fashion. However, being skeptical of the U.S Federal Reserve and its ability to miss signs plainly in front of them is a full time job for many analysts and it pays well.
As said by many before, many members of the U.S Federal Reserve have the profound disadvantage of not having the experience of 'skin in the game'. Many Fed officials have worked as paid bureaucrats their entire lives and have literally 'studied' their way to the top of the central banking world, without having firsthand knowledge regarding the daily chore of running businesses. Most Fed officials have no dirt under their fingernails.
The Fed is clamoring now to return the U.S inflation level to 2.0%, and there is a large amount of disagreement about how this number is interpreted via different economic gauges. The Federal Reserve has a poor track record as stated above for being able to know what is actually ahead. They have been very aggressive regarding raising interest rates the past year and a half, and now they are finding it difficult to say they are done. This tough talk could be an attempt by the Fed to create headwinds for those considering proclaiming the U.S central bank should become 'dovish' by speaking tough about potential pitfalls to come, this even though the Fed plainly missed dangerous road signs a few years ago which helped agitate the problems being dealt with at this moment.
What could go wrong you ask? A credit crunch for banks and consumers.
However, business people know all about potential crisis if they have enough experience. Paying employees wages, finding additional good employees, landing a space that charges a reasonable amount for rent, hoping taxes remain sane, and hoping your shop is not shoplifted into poverty are some obstacles business owners face nowadays in the U.S. The rising costs of wholesale prices has not completely disappeared, but things may be getting better via economic data. Maybe this will be proven wishful thinking, but outlook is important and should be considered.
The rising costs of doing business is then passed along to consumers. The Federal Reserve seemingly doesn't understand that it has made it more expensive to accomplish positive business results for small owners of enterprise in the U.S, and the Fed seems to forget that over 44% of the American economy is powered by what can be called family owned companies. The Fed certainly doesn't mention that it is hard enough for small U.S business to survive over the long haul, with a number of nearly 65% becoming failures after ten years statistically.
So while the Federal Reserve talks a great game about managing interest rates via their monetary policy and the Federal Funds Rate, they often forget about the problem small business owners face. Having said that, the higher interest rates the Fed has sparked because of its slow reaction to what they perceived as transitory inflation two years ago - is having a bad effect on bigger businesses too. This because big corporations no longer enjoy 'free money' from their banks. Money has become harder to attain.
Once again it has been proven that everyone looks like a genius when the U.S economy is sailing smoothly, but when obstacles develop and people have to quantify solutions to real problems, suddenly it is harder to produce profitable results. The U.S government has created massive deficits by using huge amounts of cash stimulus to protect economic growth in the U.S over the past five years. In fact because of the quantitative easing after the financial crisis of 2007, it can be argued the U.S has used stimulus for more than 15 years to make sure the U.S economy is 'stable'. Politicians like to keep their jobs because there is little else they can do in the real world.
The Federal Reserve by increasing the Federal Funds Rate has made U.S Treasuries a feeding frenzy and yields have increased substantially. The higher rates of interest the U.S government will have to pay down the road on existing U.S Treasuries is not a small problem mathematically. However, for the time being the Federal Reserve and U.S government seem to be less concerned about what they are potentially putting on the shoulders of future generations of U.S citizens, and trying to keep the U.S population tranquil. Luckily for many American homeowners, U.S mortgages are still mostly being paid out via the lower interest rate amounts agreed upon a couple of years ago and beyond. New home sales and existing home sales are sputtering in the U.S, because many people do not want to pay the higher interest rates that now need to be signed upon for mortgages and paid.
What the U.S Federal Reserve needs to do is to state publicly that it is not going to raise interest rates over the mid-term, and that it is going to allow the free market to work itself out via enterprise with supply and demand ratios taking center stage and being allowed to work. And lastly, that if inflation conditions as expected continue to improve by decreasing, that the Federal Reserve will consider lowering interest rates in the first part of 2024.
However, the Federal Reserve is worried that if it does sound too positive, businesses will start to gamble on a better outlook and this will raise existing inflation which has been stubborn. But again, the Federal Reserve often doesn't understand how smaller U.S businesses work. To get out of the current economic mess the U.S Federal Reserve needs to be pro-active and not reactive. Also, the 'ruling' U.S government has to cut back on stimulus programs with promises of a 'free lunch' for all and return to looking at numbers realistically. Fiscal responsibility is an idea that can actually be practiced.
Comments