There are three Federal Reserve meetings before July 1, and James Bullard, president of the St. Louis Federal Reserve indicated to Bloomberg News that he has become “dramatically” more hawkish when it comes to raising interest rates to curb inflation.
Before releasing his statement to Bloomberg News, Bullard evidently didn’t support a full percentage rate hike. However, after reports released showing consumer prices soared by 7.5% in January, which has been the fastest-12-month gain since 1982, Mr. Bullard has a different position on the need for aggressive interest rate hikes.
This past 12 months inflation has unexpectedly accelerated month-over-month.
Will raising interest rates actually reduce inflation?
Peter Boockvar, who is the chief investment officer at Bleakley Advisory Group, informed CNN that it is “weird” that consumer prices grew by 7.5% while Fed only responds with a small rate hike. Boockvar said, “if you want to get back control of your creditability and reputation you should be more inclined to raise 50 [basis points] than 25 [basis points].”
Alexander Lin, who is an economist at Bank of America, communicated to CNN that “the risks are growing for a 50-basis point rate hike.” Interestingly, Bank of America had been wanting the Feds to raise interest rates seven times this year, which means it wanted the Feds to slowly raise interest rates a quarter point increase at a time. After the consumer price report, however, Lin now insists that “the goal is to engineer a soft landing in the economy… [and] this means pushing back on the economy just enough to get growth below where they think the trend is.”
The Fed is nervous. Raising interest rates too aggressively, could panic investors who are accustomed to rock-bottom rates.
The Fed interest rate which is also known as the “federal funds rate” is the rate at which banks and credit unions borrow from and lend to each other. This rate is determined by the Federal Reserve (Fed). When the Fed adjusts this rates, consumers are impacted because these rates influence the interest on credit cards, loans and savings accounts to varying degrees. Traditionally, the Fed’s interest rate is an important tool for maintaining a stable economy dominated by fiat currency.
The current Fed interest rate is 0%, which means banks and credit unions can borrow and lend to each other with 0% interest which in turn, allows these same entities to loan to businesses and consumers with lower interest rates.
Does raising Fed Interest rates help the common man have more buying power?
Historically, the Fed raises and lowers interest rates to stimulate the economy leading up to and during economic downturns. And it raises interest rates when the economy is strong in order to keep businesses and consumers in check.
Has the Feds been puppeteering our behavior and we didn’t even know it?
By raising interest rates, the Fed is saying the low interest loans on mortgages and on credit cards are not reasonable anymore for a healthy economy. A low interest rate means there is more cash in circulation. More cash means consumers and businesses borrow more money, and this allows for higher consumer spending and encourages businesses to expand, hire more, and increase wages. The Fed supposedly adjusts interest rates to smooth the ups and down of the American economy, which in turn, eases the severity of recessions and prevents economic booms that can result in market crashes or excessive inflation.
The Fed raises interest rates to discourage banks from borrowing from each and other and to reduce the cash supply in the economy. High interest rates means consumers are borrowing and spending less. This raise in interest rates occurs when the economy is strong.
Is the American economy strong right now? Has the Fed waited to late for this traditional game of interest rate adjustment to work? Did the influx of cash in 2020 and 2021, the pandemic and cryptocurrencies change the game and the Fed’s interest rate adjustment playbook is inoperable?
According to an article written in November 2021, the October jobs report exceeded expectations with unemployment hitting an all time low since March 2020. Also, the stock market hit record highs last year as well. Additionally, wages increased 6% and hourly wages increased 11% which outpaced inflation by 3 times and 5 times for hourly wage-earners according to reports last year. The everyday worker’s wage had been stagnant for years, but in 2021 we begin to see these workers getting the pay they needed to live. Companies across the country were raising hourly wages to $15 per hour and offering perks for employees to pursue education.
And then came January 2022 that reported that inflation increased almost 8%, the highest since 1984.
Does that mean all that great news we were hearing in 2021 about increased wages was “bullshit.”
Any increase in wages you may have had was reduced by the almost 8% inflation hike. Your buying power after the raise was essentially neutralized in a few short months.
We have seen similar games the Fed has played over and over again.
In 2017, an article was written in The Gazette entitled “7 benefits of an interest rate hike.” Basically in 2017, the Fed raised interest rates twice. According to this Gazette article higher interest rates have these benefits (my comments in parentheses):
Higher returns for savers in traditional banks (that might be an exaggeration)
Tamed inflation (in 2017 according to the Gazette inflation had been virtually no-show in United States in recent years but now in 2022 we all of a sudden got an 8% hike, really????)
More lending (with higher interest rates banks make more money while the average consumer pays more money to borrow and the game of back and forth continues —have you won in this money game yet? It’s rigged to keep the poor person poorer but believe one day it will get better)
More interest income for retirees on money saved in CDs and savings account (who saves money in CDs and savings account nowadays and if you do have you really made any significant money from doing this?)
Strong dollar help US travelers (this might be true but how many average Americans do that much international travel)
Stocks will trade on fundamentals (stock will trade based in actual value instead of the central bank’s easy monetary policy— could this mean for 2022 a stock market crash is near)
Would-be homebuyers may get off the fence (if you want to buy a home you better do so now because interest rates on mortgages are going to get a lot higher but all this does is rush )
I am not so sure these 7 items above really benefit the average consumer today. You are not going to make money saving in a bank. In 1980, you could have gotten a three-month CD and earned 18.65% annual percentage yield (APY). Now that’s an investment with a return worth waiting for, but those days are gone. And I don’t think they are ever coming back. Saving in a bank will only keep you poorer.
In the past 5 years, the highest rate you could earn on a CD was around 1.3%APY. Putting your money in a CD is like burying it. And by the time you dig it back up, what you buried will be worth less and what you earned in interest on what you buried will be insignificant. The highest savings account interest rate you can get today is around .70% APY.
Simply put if you put $10,000 in a savings account earning 0.01%, after a year, your account would have grown to $10,001.
As the average consumer, it’s time we begin to ask: what is money? And how do we as average consumers play the money game better?
ABOUT THE BLOGGER
La Shon Y. Fleming Bruce a/k/a SHONSPEAKS is a blogger, speaker, and lead creator of freeyourthinkingmind.com. I am also a lawyer and managing member of The Fleming-Bruce Law Firm, P.L.L.C. If you want to check out more of my writings that may not be released on this site, go over to my website at freeyourthinkingmind.com
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