Which Is Easier to Fix, Recession or Inflation?
They did it again on Wednesday. The Federal Reserve raised by 0.75 percentage points yesterday and also June. Yesterday is the fourth rate increase this year. But what does all of this really mean?
The most notable issue in the economy is inflation. Raising interest rates is the Fed’s weapon to try and bring inflation back under control. But what interest rate are they raising and what did they raise it to? Not one person I’ve asked that question has the correct answer.
The 10-year Treasury’s are paying around 3 percent and 30-year fixed interest mortgage rates have risen to about 6 percent. But it’s neither of those rates.
The Fed changes what is called the Federal Reserve rate which is a short-term interest rate. It is the rate that the Federal Reserve charges banks to borrow money from it. Tuesday the rate was 1.5%-1.75% and Wednesday it became 2.25%-2.5%.
Why are the other interest rates so high if the Federal Reserve’s interest rates are so low?
From this moment on isn’t it true that the Federal Reserve now has only two strategies that it can employ. Neither strategy will be beneficial to the American people.
HERE ARE THE FEDERAL RESERVE’S CHOICES:
- They will continue to raise interest rates at every meeting that they have until they get inflation under control. Trying to combat inflation with rate hikes is not only ridiculous, but it also creates market risk disaster because our debt is much higher than our GDP. Fighting inflation requires neutral, level rates or said a different way, rates that are higher than inflation. If current inflation is 9.1 percent that would require interest rate increases to at least 9 percent. When Paul Volcker was the Federal Reserve Chairman in 1980, he raised the Federal Reserve rate to 20 percent. Our debt at the time was $900 billion. Currently, our debt is almost $31 trillion. There is no way the Federal Reserve can raise interest rates to the necessary level required to calm inflation. They will probably continue to try, however. If they do, they will push our economy into recession and possibly a severe recession. That means all the markets inflated by easy money will deflate and some rapidly. That is why this is called the “everything bubble.”
- Their second choice would be to discontinue interest rates at the next meeting and resume printing money. That would prevent a recession; however, it would easily move our inflation numbers into double digits. Inflation would increase to 11 or 12 percent or even more. Why would the Federal Reserve do that? One consideration would be to prevent a recession. We have a mid-term election coming in November and it seems like the party currently in power is in trouble. With markets continuing to expand, that party could sell the idea that they are the party that is good for the economy. This might allow them to stay in power.
So, which is easier to fix? Is a recession easier or is inflation easier to fix?
Before I share my opinion on this important question, I would be happy to hear your thoughts. Is inflation or recession easier to fix? Which is more important to you and your family to avoid.
Click here and send me your thoughts and next week I’ll provide mine.
For now, enjoy the last of July. I hope you’ve had a chance to travel, spend time with family and friends or have them visit beautiful Colorado.
