No Matter What You Call It, Storm Clouds Ahead

Academics have their code words when times get tough. Do we have high inflation? Are we in a recession, depression, or stagflation?

Few people care what they call it, other than politicians who want to blame their political enemies and avoid responsibility. Both the disease and cure hurt people economically.

The Fed says they target 2% inflation. When inflation started rising, they changed the target to “average 2%” with no further explanation. Inflation continued to roar. They ignored it, called it transitory, continued to create more money, bought debt in historic portions, while the government deficits set records.

As the pressure mounted, reluctantly, the Fed finally began to act. Fed Chairman Jerome Powell began raising rates. John Mauldin shares Fed Chairman Powell’s recent comments:

“‘The FOMC’s overarching focus right now is to bring inflation back down to our 2% goal.’ He also implicitly critiques their own policy shift…where they said they would tolerate a period of higher inflation above 2% to average out a period of below.”

“Our responsibility to deliver price stability is unconditional…. We are committed to doing that job.”

“Restoring price stability will likely require maintaining a restrictive policy stance for some time. The historical record cautions strongly against prematurely loosening policy.”

“….we must keep at it until the job is done.”

…. “Reducing inflation is likely to require a sustained period of below-trend growth. …. Moreover, there will very likely be some softening of labor market conditions.”

“While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses. These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain.”

…. “We will keep at it until we are confident the job is done.”

Pundit Bill Bonner further explains:

“Mr. Powell is right. Getting control of inflation will be painful. Higher interest rates will mean less borrowing, less hiring, less shopping, lower profits, lower asset prices and lower tax receipts for the US government. It’s a recession, in other words. And it’s how the economy corrects the mistakes and excesses of the Bubble Epoch. That’s the whole idea.

But the pain has hardly begun. The Fed has to get ahead of inflation, not trail far behind it. It has to continue raising rates, until something gives – either inflation…or its own backbone.”

Powell is talking tough – but….

Interest rates for borrowers and lenders must rise above the inflation rate, and government spending must come down. In one month in 2020 the Fed added more new money into the economy than had been printed in the previous century.

Raising interest rates will continue to slow the economy. That costs people jobs, business will slow down, and the current recession will continue to deepen – the “unfortunate costs of reducing inflation.”

READ MORE HERE