Monday, June 11, 2018

Instead of simply a quarter point rate hike this week by the Fed, they better look at whole numbers instead since inflation is back that of 1979

One of the primary reasons why the Federal Reserve is so far behind the power curve when it comes to handling interest rates is because they refuse to look at the real numbers rather than the politically manipulated ones coming out of Washington.  And because of this, the central bank has absolutely no real idea on just how bad inflation has risen, especially since the time they embarked on their unprecedented programs of monetary expansion.

This week brings us once again to a Fed FOMC meeting, and the decision by the central bank to either raise interest rates to curb inflation, or do nothing to protect their overblown bubbles in the stock, housing, and automobile markets.  But sadly even if the Fed raises interest rates by just a quarter point, it will not even scratch the surface on an inflation rate that is now back to the time when Paul Volker had to do something extraordinary.

By the time Volker became the Chairman of the Federal Reserve in 1979, inflation was raging at 9.9%.  And to counter what the central bank had done preciously by imposing tiny incremental moves to the cost of borrowing money, the new Chairman threw out the old model and chose to control interest rates on a daily basis, rather than periodically.

Throughout the late summer and early fall of 1979, the Federal Reserve under Volcker had begun pushing the federal funds rate slightly higher. At the same time, unemployment began rising to about 6 percent, a move that began making officials in the Carter administration nervous, according to media accounts at the time. An unnamed Treasury official told the Wall Street Journal in September that the Fed would be forced to cut interest rates once unemployment hit 7 percent, “because the unemployment rate will be too high and Congress isn’t willing to bear that burden.” 
However, some members of the Federal Open Market Committee remained concerned about the level of inflation, and Volcker made a dramatic move to attack the problem. During a rare press conferenceOffsite link on the evening of October 6, 1979, the Saturday before Columbus Day, Volcker announced the results of an unscheduled FOMC meeting held earlier that day. 
In front of reporters who had rushed to the Eccles Building to cover the unexpected announcement, Volcker explained the FOMC would shift its focus to managing the volume of bank reserves in the system instead of trying to manage the day-to-day level of the federal funds rate (Lindsey et al. 2005). It was an approach that would lead to more fluctuation in rates and, Volcker hoped, rein in inflation. 
Previously, the Fed had conducted policy by targeting growth rates for the money supply and by keeping the federal funds rate within a narrow range that was believed to be consistent with the monetary growth objectives. This was the result of a congressional mandate that required the Fed to set targeted growth rates for the money supply and report on its success or failure to meet the targets. However, as the Board of Governors noted in its Annual Report for 1979, “It was felt this procedure had become less reliable in an environment of rapid and variable inflation.” – Federal Reserve History
 At the height of Stagflation the inflation rate was at an annual rate of 13.5%, and eventually the interest rate would be raised to just over 20%.  However what was most interesting was that when Chairman Volker started his no policy of daily monitoring of rate initiatives, interest rates were at a starting point of 7.5%.

Here in 2018 we have suddenly reached that similar day in 1979, where inflation according to models from that time period show us that we have a 10% annual rate of inflation.  However where interest rates had a starting point of 7.5% back then, today we are not even up to 2%.


Current Fed Funds Rate:


So the Fed is indeed in a dilemma, and one in which there is only a single real proven solution.  But do today's central bankers and American politicians have have the stomach to invoke the necessary medicine, or is the U.S.'s fate already sealed where very soon inflation will reach the point where it is past the point of no return?

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