Friday, March 18, 2022

Beyond Inflation and Interest Rate Increases: Where We Are, and Where We Could Go Instead

On Wednesday, the solid Federal Reserve news finally hit.  Per “Fed raises rates and projects six more increases in 2002” (The New York Times, March 16th), the federal funds rate, lower than the prime rate or discount rate, went up 0.25% with more hikes, likely though dependent on how inflation and other factors perform, on the way.  This is a small increase – the Fed has been known to boost or cut rates 2% or more at once – and it shows caution.  Is that a good thing?

The oldest of nine pieces here was published just over a month ago.  In Jeanna Smialek’s February 17th New York Times “Could Wages and Prices Spiral Upward in America?,” the author maintained that “even if wages and prices are both rising now, it is not clear that they are egging each other on yet,” accurate, as the current bout of inflation has specific causes, namely pandemic recovery, workers refusing positions with pre-2021 pay, and a war between two wheat-exporting countries one of which is among the world’s largest oil producers. 

Between political views distorting many people’s assessments of our situation and the emotional effect of high inflation, we have “America’s Very Peculiar Economic Funk,” by Paul Krugman, on March 3rd and also in the Times.  Peculiar, as “if you ask people “How’s the economy doing?” as opposed to “How are you doing?” you get a very different answer.”  As there clearly is a “disconnect,” Krugman held that news sources are “missing a big part of the story if we take negative public views of the economy at face value without pointing out that they’re at odds not just with official statistics but also with self-reported experience.” 

The same author and publication returned with “How the Putin shock might affect the world economy” (March 8th), a good primer on this topic.  Krugman concluded “that it will be bad, but not catastrophic,” with problems centering on grain and fuel as above.  He said the spike in oil prices took him by surprise, in effect a good prediction as it has since greatly receded.

A long-time nuisance for workers may come under deserved pressure, as “Amid rising inflation, many Americans would prefer an increased pay frequency, survey says” (Fox Business, March 9th).  In a recent J.D. Power study, 59% said they were “paid every two weeks,” and of them, 35% (only?) wanted weekly checks instead.  I think those with relatively low income should be paid more often, and with less elapsed time, as it’s fair that they want to spend their earnings sooner.  I urge organizations to improve that.

We read about overall higher prices, but that doesn’t mean they have been going up uniformly.  In fact, there are large differences, as shown in “Where Inflation Is… And Isn’t,” in Yahoo Finance on March 10th.  This chart showed that the “12-month change,” overall 7.9%, had “used vehicles” increasing 41.2%, gasoline 38.0%, hotel rooms 25.2%, rental cars 24.3%, and “transportation” 21.1%, along with “household energy,” airfare, and “new vehicles” each up from 12.4% to 13.3%, and furniture, “food at home,” and “appliances” from 7% to 10% higher, followed by “food at restaurants,” clothing, housing, “personal care,” “pets & pet products,” “recreation, and rent increasing from 4.2% to 6.8%.  This data is important, as it tells us where the problems have and have not been.

Paul Krugman again, in the March 14th New York Times, seemed to have got what he wanted in “How Not to Have a Putin Recession.”  He agreed with small interest rate hikes, but said that “what the Fed should not do, however, is allow itself to be bullied into slamming on the brakes, drastically raising interest rates the way it did in the 1970s” (italics his).  He emphasized oil prices, and our current inflation is more broad-based, but there is indeed more danger in lifting money costs too quickly than too slowly.  A day later we saw “Global Economy Sinks Deeper Into Turmoil as Fed Prepares to Raise Rates” (Ana Swanson and Jeanna Smialek, The New York Times), emphasizing Chinese pandemic-related delays and shutdowns along with the effect of the Russia-Ukraine war on other countries.

Last, issued only hours before the interest-rate announcement, was Peter Coy’s “The Fed could cause a recession, this economist says,” also in the Times.  “The economist David Rosenberg” was concerned that “in trying to steer clear of the Scylla of inflation, the Fed could inadvertently plunge the U.S. economy into the Charybdis of recession.”  That summarizes my view as well.  We’re not going down to 2% inflation this spring, no matter what we rationally do, but we can keep the economy strong as we get it to slowly improve.  That is the best course, and the numbers, if not the people, will confirm that.

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