The Federal Reserve took a long, hard look at the raging inflation that America is suffering from — the highest since 2008 — and took decisive action.
It did nothing.
On Wednesday, the Fed held the federal funds rate — the amount of interest commercial banks charge each other for overnight loans — at the same historic low: zero to one-quarter of a percent. The rate hasn’t budged since March 2020.
What this means is that money will continue to be very cheap to borrow, spurring on an already overheated economy with key inflation indicators — such as the “all items index” — exploding to levels not seen since 1992.
Fed Chair Powell’s Message Is Direct Opposite of Reality
The Fed’s Chairman Jerome Powell said on Wednesday, “The Fed’s policy actions have been guided by our mandate to promote maximum employment and stable prices for the American people, along with our responsibilities to promote the stability of the financial system.”
— Federal Reserve (@federalreserve) June 16, 2021
However, this inaction is having the opposite effect. By keeping the cost to borrow money at or near zero, there is an immense incentive to flood the economy with cheap money.
And with the Bureau of Labor Statistics reporting last week that the consumer price index clocked in at a whopping 5.0 percent inflation rate for the year — the highest since 2008 — cheap money is exactly the opposite of what is needed.
As for the Fed’s intention to “promote maximum unemployment,” the BLS reported that 9.3 million jobs were created in April, which, coincidentally enough, matched the May unemployment number of 9.3 million.
Essentially, one job has been created for every unemployed person, but due to the Pandemic Unemployment Compensation program, people are disincentivized to take these jobs.
With the $300 weekly unemployment bonus, they essentially are being paid not to work.
The Fed is keeping the rates low to spur businesses to create new jobs, but there are already enough jobs for every able-bodied American.
Biden Cuts Minimum Wage Increase, Slashes Americans’ Retirement
Aside from any market increases or contributions, the average retirement balance is already worth 5 percent less than this time last year, and the Fed’s inaction will only spur inflation to greater heights.
And when Congress finally does increase the minimum wage, the raise that poorer workers were expecting will be worth less. A simple calculation shows that the $7.25 minimum wage had the buying power of $7.61 a year ago.
Biden’s Hands-Off Approach Compared to Trump’s
President Joe Biden has personally said very little about inflation aside from trotting out Treasury Secretary Janet Yellen who is “monitoring” the situation, Reuters reported.
“We’re monitoring inflation very carefully and take it very seriously. No one wants to return to the bad high inflation days of the ’70s,” Yellen said.
Contrast that with former President Donald Trump’s engagement with the Fed. Agree or disagree with Trump’s economic policies, he was scathing in his critique of the Fed. He gave voice to American’s frustration with the economy and ensured the Fed heard it.
The Federal Reserve historically has set an acceptable inflation target at 2 percent — a mark it has met for more than a decade prior to the Biden administration.
But, the Fed’s inaction today will only spur inflation to greater heights.
Inflation Reaches Dizzying Heights
In addition to the CPI’s inflation rate of 5.0 percent, even more troubling than the consumer price index is the soaring “all items index,” which the BLS noted is climbing faster than at any time since 1992.
Some of the frightening year-over-year price increases include:
- The energy index rose 28.5 percent, with gasoline a shocking 56.2 percent higher — roughly a dollar more a gallon at the pump.
- Used car prices were 29.7 percent higher. The average price paid for a car in 2020 was $20,292 — today, it is $26,363.
- Natural gas increased 13.5 percent, and electricity saw a 4.2 percent increase.
- Food and housing were both up 2.2 percent, and clothing was 5.6 percent higher.
Yellen says she doesn’t want to return to the bad high inflation days of the ’70s, but the Fed’s inaction is doing exactly that. One thing is for certain: My sideburns are far too short.
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