Fed Interest Rate Hike and the Possible Impacts

https://www.reuters.com/world/us/all-systems-go-feds-liftoff-us-interest-rates-2022-03-16/

 

March 17, 2022

                The Federal Reserve raised the Fed Funds interest rate as discussed in the article from Reuters (listed above). Now begins the very delicate balancing act of raising rates, which is supposed to reduce inflation. The problem is the interest rate lever is not particularly precise nor the effects very controllable. Don’t be fooled by the Fed language. It sounds like they have the ability to precisely control the effects and impacts of the changes. They don’t. The changes caused by the Fed’s interest rate adjustments will tend to be in a general direction (tightening or loosening policy) but the magnitude of impacts is not really knowable or controllable. What does a .25% increase do vs. a .50% increase? The problem is, too much increase too fast and the economy goes into immediate recession, too little increase or too slow and inflation just keeps on going. The Fed doesn’t really know the impact nor does anyone else. It’s like a go-cart careening downhill out of control and the brake is the stick against the wheel. Maybe it works, maybe it doesn’t. Remember, there is no fine control regardless the words or language used or implied. Soft landing, controlled slide, easy fix are just words with no meaning in this type of situation. There will be under and over correction, wild swerves and hairy curves on two wheels. There will be missed turns and some likely drop offs. A crash is also likely (recession) and in the current situation we may have a couple of crashes before it settles out completely. You will notice lots of corrections and changes in forecasts and the news media will begin to pay less attention to changes and such as they become more frequent. You will have to dig that out yourself. There will be pronouncements by various Federal officials and large bank economists about this and that affecting the inflation rate. They will be all over the place. Energy, food and commodities prices will bounce around generally going up (inflation) until they don’t which may be caused by recession or if we are really, really lucky by successful Fed policy. It sounds fairly bleak but we have done this before and it can be fairly mild, think the recession of 1997 and 2002. They were really quite mild. Remember, the definition of recession "is a macroeconomic term that refers to a significant decline in general economic activity in a designated region. It had been typically recognized as two consecutive quarters of economic decline, as reflected by GDP in conjunction with monthly indicators such as a rise in unemployment.” (www.investopedia.com) If we have less than the 2 quarters of downturn this is not considered a recession but it is an economic slowdown. That is really what the Fed is trying to achieve, a series of down sloping waves that reduce inflation but don’t quite drive the economy into the red zone definition (recession). They will do everything they can to avoid the recession definition, it looks very bad for them. Perception is everything.

                So, hope for the ideal series of corrections. A series of down sloping waves that never quite reach the definition of recession but that bring economic activity down by drying up the easy money currently circulating in the economy. We should see higher borrowing costs (interest rates), higher prices on commodities, energy and food and less spending. That is going to be challenging for people as we have become used to spending. I am hoping home prices come down without a crash but we will have to see. Again, this isn’t the end of civilization as we know it. We have had inflation and recession before, some mild some not so mild. The US economy will make it through this even though it may take a while but it will be okay. Reduce you debt as able or avoid it by postponing things, save more and above all… enjoy life, stay close to family and friends, take some time for yourself and don’t spend too much time listening to the talking heads in either government or the media.