So the Fed decided not to reduce interest rates last week. No surprise; they do everything too late. Nothing new there. It’s sad really, that they are playing politics.
Where’s my evidence? Well, let’s start with the inflation rate. The month over month inflation rate came in at 0.1%. Multiple that by 12 months and annual rate would be at around 1.2%, well below the Fed’s 2.0% rate.
Then there is Chair Powell’s insane statement that he is worried about the inflationary effects of tariffs and also about the possibility of a recession. Yes, he actually said that in the same sentence. Anyone with half a brain knows that if you have a recession, then you have a slowing of the economy – negative growth actually – and that people get laid off and sales decline. The result is a drop in inflation since sellers don’t have pricing power during a recession.
So he’s worried about the inflationary effects of tariffs, but also about a recession, but you can’t have both at the same time. Also, many companies will absorb at least 10% of the tariffs right off the bat by asking suppliers to chip in. Consumers will also substitute by buying alternatives.
And American companies will quickly adjust their supply chains by sourcing domestically. (Heck, they’ve had nearly half a year already since Trump was elected and he did say he would raise tariffs before that.)
Also, the uncertainty caused by tariffs will result in slowing of the rate of investment, as capital sources will curtail their investments until the certainty increases. That will create a slowdown in the economy also. So yea, we have to take our bad-tasting medicine, but that also means less inflation. In addition, China and Zi are feeling the pressure – as their workers who have been laid off due to the tariff wars are protesting Zi’s approach to this fight. Eventually, Zi will begin to realize he can’t sustain this fight, or he’ll lose his position as dictator. The politburo isn’t going to let this go on too long for fear of civil war.
In addition, Powell should be lowering rates because of the increased tariffs, to offset the cost of the tariffs. What’s mind-blowing is that the Fed can’t figure this out.
The NY Fed even said that interest rates will depend what happens in the economy. No, no, no! Darn it, no. That’s like driving the bus by looking in the rear-view mirror. It’s not the job of the Fed to steer the economy. What is their job is to a.) provide stable and low interest rates, b.) support a strong dollar, and c.) avoid inflation by avoiding running the printing presses. The Fed caused inflation by printing $6 trillion of new money. The private sector had nothing to do with that.
It’s time for Powell to go.
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