Finance / Government Watch / We The People

The Inflation Cure

Inflation

If you think runaway inflation is brutal, wait until you get hit by the cure.

Last week, the Federal Reserve raised the interest rate on money it lends to other banks by .75%, the biggest hike in three decades. Fed Chair Jerome Powell said the hike is necessary to rein in skyrocketing inflation. He’s planning more hikes in the coming months. These hikes will lead to increased interest charges on credit cards and higher rates on home equity loans, car loans and mortgages. It’s a punch in the gut for people who need to borrow.

Get ready for the interest rates on your credit card to top a budget-busting 20% two monthly statements from now — up from a current average of 14.6%.

If you’re shopping for a home or a car, adjust your expectations downward. You will now be able to afford less than you thought because monthly payments will include significantly higher interest costs.

The Fed has no choice but to act. In fact, it waited too long. The Fed’s mission is to maintain price stability and full employment. Inflation hit a 40-year high in May.

Inflation is partly global, but it’s significantly worse in the U.S. than in other developed countries, according to a report from the San Francisco Federal Reserve. Excessive government spending has made the nation awash in cash.

During the pandemic, consumers had money deposited in their bank accounts by Uncle Sam. When COVID lockdowns ended, they went out to spend it. That pushed prices upward. Those giveaways are now causing inflationary pain.

Had the Fed acted sooner, contends former Obama administration economist Steve Rattner, the rate hikes would not have to be so drastic, and the cure so painful. The Fed “was inexplicably slow,” he says.

Harvard economist and former Treasury official Karen Dynan predicts “generalized pain” in the coming months.

“The transition is going to be very difficult,” cautions Seth Carpenter, global chief economist at Morgan Stanley, who adds that it takes a long time for inflation to come down.

That’s the straight story you’re not getting from the Biden administration and its allies. In a Washington Post column, Biden ally Sebastian Mallaby, from the Council on Foreign Relations, applauded the Fed’s hike as “courageous” and praised President Joe Biden for backing Powell.

Truth is, prices are expected to stay high in the coming months. Borrowing to pay those higher prices and keep the family afloat will be prohibitive.

Financial adviser Suze Orman is urging people to pay off their credit card debt and live within their means — easier said than done. The average household has to spend $450 more a month than last year for basic necessities such as food and energy.

As for mortgage rates, they are the highest since 2008. The cost of a 30-year fixed-rate mortgage hit 6.28% last week, nearly double what it was at the end of December.

During COVID, the Fed took actions to make mortgages as cheap as possible, but now it’s pursuing opposite policies. Powell says housing prices “need a bit of a reset.” Look for softer prices but higher borrowing costs.

Borrowers are losers under the Fed’s strategy. But savers are winners. If you have a nest egg, you can shop around and likely get much better interest income on your money.

Job security is another matter. Protesters rallied outside the Fed building in Washington, D.C., on June 15, wearing T-shirts that said, “full employment defenders.” They warned that cooling the economy could jeopardize the jobs of low-level workers. Former Treasury Secretary Larry Summers also says taming inflation is improbable “without a substantial increase in unemployment.” Maybe, but unemployment now is still near historic lows.

The next few months will be tough for many people.

Biden conceded to the Associated Press this weekend that Americans “are really, really down.” Sorry, Mr. President. Forget the crocodile tears. What we need is for prices to be really, really down.

Betsy McCaughey is a former lieutenant governor of New York and author of “The Next Pandemic,” available at Amazon.com. Follow her on Twitter @Betsy_McCaughey.

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JEFFREY JONES
5 days ago

SAVE THE U.S.A…..declare a civil war against the demonrats,, commies, and other America haters!

Bob L.
6 days ago

Raising the interest rate did just the opposite of what’s needed. It is like throwing gasoline on a fire and adding insult to injury.

Deficit government spending is the main cause of inflation and devaluation of the purchasing power of the dollar. The federal government hasn’t had a “balanced” budget in decades and hasn’t even voted on a new budget in that time either. What they do is vote for and pass what’s called a “continuing resolution”., in other words, extending a budget that’s been around for decades and work around it’s limits by voting for creative legislation to add funds over and above the shortfall in that budget. It’s the same chicanery used to fund all of the new programs, foreign aid, give-aways, and pork without having a budgetary limit on spending. As things stand (with the powerful leadership in both chambers of Congress) they will never formulate and pass a balanced budget.

Becky
4 days ago
Reply to  Bob L.

It also allows the government to continue barack the muslim’s extra 1 TRILLION per year deficit spending.
And they never have to admit it.

anna hubert
6 days ago

If only by some miracle we could rid ourselves of all the federal departments agencies appointees and overseers then we’d know what dog must feel like when he is rid of all the ticks I am confident we would be able to figure out what to do one can only dream

PaulE
8 days ago

This may be a bit too technical for some folks here, but it showcases both the limitations of the Federal Reserve in the tools at its disposal and the historical mistakes the Federal Reserve has consistently made in the application of those limited tools. Remember, the Federal Reserve Banking System was expressly created in 1913 with the promise from the Washington Progressives in power at the time, that its creation would put an end to recessions ever happening again.

Of the last 12 recessions since 1950, 9 were caused by the Federal Reserve over-shooting on their interest rate tightening program to bring about the actual economic recession. Expressed in terms most people can more easily understand, the Federal Reserve has been directly responsible for creating 75 percent of the recessions since 1950 through misapplication of their one and only real tool: jacking up interest rates to slow down the nation’s economic activity. With that kind of record, the idea of a so-called “soft landing”, where the government effectively neutralizes inflation without triggering an economic recession is due more to dumb luck more than any professed skill level of the members of the FOMC (Federal Open Market Committee).

As to the our current inflation situation, its main causes are a mix of over-stimulus by the Biden administration and the Democrat Congress via massive over-spending of trillions of dollars that were either borrowed or printed out of thin air debasing the value of existing dollars, the destruction of the American oil and natural gas sector via punitive regulations and policy changes that set off a ripple effect throughout the economy driving up the prices of nearly everything and finally a Federal Reserve that stayed accommodative way too long and said and did nothing as the Biden administration inflicted one inflationary policy after another on our economy for the last 18 months. The end result is that inflation was 1.4 percent the day Biden “won” the election and today the official inflation number is 8.6 percent (it is actually 10.9 percent when recalculated using the old formula the government used by in Jimmy Carter’s days).

Federal Reserve interest rate tightening can only address two areas: The excess money issue in the economy and the inflated assets issue caused by the Federal Reserve buying up so much of the government bonds used to finance our reckless spending. That entails the Federal Reserve suppressing economic growth and drastically reducing economic demand. Which, given the limited tools the Federal Reserve actually has, entails causing a recession in 3 out of 4 cases.

The Federal Reserve CAN NOT however do anything to address the inflationary pressures put on the American economy by Biden and the Democrats crippling our oil and natural gas sectors aside from crushing demand for gasoline and diesel by crushing the overall economy to reduce all economic activity across the board. Even then, people will still need to heat and cool their homes and businesses and keep the lights on. So this part of the equation would require a complete repeal of all the bad energy policies that the Biden administration and Congress inflicted on the country since Day One of the team Biden. That is NOT going to happen until someone like Reagan or Trump is sitting in the White House and we have a Congress that is actually willing to pass legislation supporting those policy changes. That’s 2.5 years away at best and assuming the American people make a better choice and the votes are counted accurately. If not, then prepare to live long-term like most western European do. They live in countries with annual economic growth rates ranging from 0 to 1.5 percent annually, if they have a good year. The inflation rate is a constant 4 to 5 percent annually. Their tax rate for everyone is 60 to 70 percent of their income and what little savings they have earns them nothing. That is all they see for themselves and their children and grandchildren.

Max
7 days ago
Reply to  PaulE

Thanks Paul E for your explanation.

PaulE
7 days ago
Reply to  Max

Thanks Max. As I expected by the overall lack of other comments on this topic, I think I provided too deep and specific an explanation of the reality of how our current bout of inflation has been engineered by the Biden administration and the Democrat-controlled Congress for a lot of folks here to either understand or appreciate. Also most people want happy talk instead of reality be laid for them. Explaining the hard fact that the Federal Reserve has really only a limited set of tools, all specifically useful only for monetary related causes of inflation, isn’t something a lot of people want to hear. It’s human nature for a lot of folks. They want to hear the government can magically fix anything, if you throw enough money at any problem. Sadly that doesn’t work.

My goal was simply to present the reality of how often the intervention by the Federal Reserve, over the last 72 years, has failed to achieve the so-called soft landing so many talking heads in Washngton and the MSM are currently trying to sell the public on. The reality of a 75 percent failure rate by the Federal Reserve to avoid a recession speaks to the need for most people to prepare now for the coming recession that will be formerly acknowledged by Washington officials in another 6 to 7 months. The economy is already slowing down rapidly towards a zero growth rate, but I expect Washington will avoid acknowledging the data for as long as possible. The primary reason being the Democrats want to bury the bad news from the public for as long as possible or at least until after the midterms.

Kim
7 days ago
Reply to  PaulE

“…prepare now for the coming recession…” Indeed! Pay off those bills!

Your explanations are always welcome and shed some light on these behind-the-curtain government and quasi-government activities. Thanks, PaulE.

Phil
7 days ago
Reply to  PaulE

Bingo, you nailed it; great explanation!!!

Max
7 days ago
Reply to  PaulE

Sometimes you have to wonder if people read everything that is put out or they just read what interests them. I try to read everything, may or may not comment, or give +/- to an article. I do go back 2 or 3 days just to see what late readers have commented on or to answer someone who has left a message. But overall, you are correct that some articles do not seem to generate interest for some of the readers.

Debby
6 days ago
Reply to  PaulE

Good research, well said.

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