Fed Raises – Did It Break the Economy?

I’m not an economist and I don’t play one on TV. I haven’t even stayed at a Holiday Inn Express, but I have been involved in finance for a long time now, and I’m old enough to have a pretty good memory. Add that to a lot of research over the years as a freelance financial writer for a lot of publications and websites, and I have an informed opinion, if not a professional one.

Fed Raises Rates 0.75% Again

The Fed raised interest rates again, another big 0.75% hike. So, here is the punchline. The Fed has raised interest rates a total of 1.5% in just two months. Look up the last time the Fed raised rates that quickly. Go ahead. I’ll wait. It was the 1980s and inflation was crazy rampant. Every economist older than 50 had drilled into their head that inflation was more of a problem than a recession because that is what is true for Wall Street. Unfortunately, that is not necessarily what is good for Main Street, and by extension, the markets.

Fed Raises - Did It Break the Economy? 1

Last time the Fed raised rates was from 2016 to 2019. That increase was a nice gentle 2.25% increase over three years. At the end, it took 12 months to go up 1.25%. All without ever touching (or even coming close) to the Fed’s so-called 2% inflation target.

The economy slowed down — that is what a 1.25% increase in interest rates is supposed to do. Unfortunately for the American economy it worked too well, and the Fed had to start cutting, and fast. They cut rates 0.25% at the July meeting, another 0.25% at the August meeting and 0.25% at the September meeting because the previous increases choked off the slow, but long simmering economy. Then, in 2020, they had to panic slash rates to 0% because of Covid.

If raising rates 1.25% over the course of an entire year pushed the economy into recession, what do you think 1.5% in just two months will do?

Hard Landing

The economy hasn’t had a chance to fully feel the effects of last month’s 0.75% increase and already the housing markets have cooled off considerably. Add to that the fact that numerous companies have stated that not only would they stop hiring people, but that they would actually start laying off people, and you have a perfect storm for a cooling economy.

The worst part is that this is all already happening BEFORE the Fed raised rates another 0.75%. What will happen now?

The Federal Reserve says it is watching the data, but that won’t help if the data isn’t there to watch yet. Rate hikes take time to filter through the economy. This is undisputed, common knowledge and yet, the Fed is forcing rates higher without the briefest of delays. All of which would be fine if the Fed were raising rates 0.25% at a time. Backing out a rate hike or two that went too far is easy. Fixing the damage of 1.5% all at once is a different story.

The Federal Reserve has essentially chosen to slam on the brakes before finding out if the road is wet or icy. At 1.5% in just two months a little skidding is inevitable. Let’s hope for the economy’s sake that the pavement is clean and dry.

Fed Caves to Pundits and Media

The Fed decided it didn’t like the negative publicity. It didn’t like economists saying they had no credibility. They didn’t like financial analysts on TV saying inflation was the worst it had been in blah-blah years. They didn’t like being called weak.

Like a child being called a chicken, the Fed has essentially said, “Oh yeah? Watch this!”

That usually doesn’t end too well for the child, which is how you learn not to respond every time someone calls you chicken. Unfortunately, the Fed’s bankers apparently never learned that lesson, and now we’ll all pay the price.

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