It finally happened. Fed Chair J. Powell did what everybody wanted. He eased interest rates. Yay, cool. Investors had waited all year for this. High fives all around. But, it doesn’t feel like it should. Could there be something amiss? Something missing? Well, yes.
Let’s look back before back actually happens. Why did the Fed cut interest rates? Sometime in the future, investors will look back and ask “Why DID the Fed cut rates?” The economy is strong, right? Those employment numbers just released were strong, right? I mean, if you can’t trust government numbers, who can you trust? Did the Fed cave to political pressure before the election? Sometime in the future, we will have our answer.
Meanwhile interest rates have not actually been declining. What? Why? Well there is this persistent pesky little problem – inflation. Yeah, inflation has been declining from a whopping 9% to 2.5% recently but it’s NOT dead. (Note; look for good inflation reports this pre-election month via government numbers) But we are looking ahead. It seems the bond market is, too.
So the Fed may just have thrown gasoline on a fire. Or, for all you backyard charcoal barbecue lovers, you know when the coals are smoldering but just don’t want to catch fire? Grab the lighter fluid and squirt like crazy. OMG, flames galore.
Keeping with that metaphor, just what are those smoldering coals? Lets take wages. Wage inflation is a real killer since wage increases usually come in long term contracts and impossible to roll back. In settling the recent port strike the union got a 62% (wow) wage increase. 10% a year. It still needs to be ratified, but I’ve heard the lines outside Ferrari dealerships are stoked with dock workers. To be sure, those wage increases will touch every product that comes into port.
Oh, Boeing workers are still out, too. Not to be outdone, those workers are hitting the Bentley dealers. The ripple effect is on and every new wage contract will have expectations built in to be bigger than the last. That’s wage inflation. Higher wages chasing goods and services. Economics 101.
Now, throw in the Mideast war and the ever increasing possibility of an oil disruption, presidential candidates offering programs that will greatly expand the budget deficit and here comes inflation. Phase 2.
So, has the Fed erred…..again? Is Fed Chair Powell second guessing himself with that rate cut? Notice there are no expectations of any further cuts. Inflation swings into Phase 2.
Got what you wished for?
