Fed Action, Once Again, Way Too Little & Way Too Late
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The Fed’s shockingly irresponsible Monetary Policy is responsible for most of the inflation problem.
At its May 4 meeting, the Fed decided to raise the Federal Funds rate by half a percentage point, or 50 basis points (BPS). That’s the largest single rate hike in 22 years. This raises the fed funds rate to the 1% range. Considering inflation is running at an 8.5% annual rate and that we have been facing the inflation problem since March 2021, the Fed action is way too little and way too late.
The inflation rate for the month of April will be reported at the end of next week. The CPI, or Consumer Price Index, is expected to be less than the 1.2% monthly rate recorded in March, but the number will be high enough to raise the annual inflation number close to 9%.
Brace for Inflation of 10%
Because producer prices have been rising at a more than a 10% rate for the last four months and because the world is about to experience a food shortage that will drive up food prices, the CPI released in June will be very high. That means the annual inflation rate could exceed 10% by summer. Clearly, that is unacceptable.
The Fed uses a different measure for inflation. It uses the Personal Consumption Expenditure (PCE), which is a measure of how consumers react to inflation rather than the actual inflation number. The PCE is now at 6.6%. The Fed target is 2%.
In addition, last November, the Fed finally started to reduce its $120 billion monthly bond-buying program. That program, started in March 2020, was similarly designed to keep interest rates low. The Fed realized that the federal government, in fiscal years 2020 and 2021 was spending about $240 billion more each month than it raised in tax revenue. Instead of having the public purchase that $240 billion monthly, the Fed simply printed $120 billion more money.
That increase in the money supply also helped to keep interest rates lower.
To recap, the bond-buying program finally ended in March of this year. Interest rates were raised by 25 basis points or 0.25% in March. That action was way too little to have any significant influence on inflation. As a result, yesterday’s 50 BPS increase was sorely needed this month…