When Inflation Is Their Policy
by David Reavill
In the most highly anticipated event of the week, the Federal Reserve Board will announce its new interest rate policy tomorrow.
All to fight inflation. But what if “Inflation” is the policy? Energy inflation that is.
While there is some question about how much they’ll raise the rate. Will it be half a percent or three-quarters? Or even one full percent?
There is no question that they will raise rates.
Now, interest rates are probably the most powerful single tool the Fed has in directing the course of the economy. Interest rates are the essential cost of money. And the higher the cost of capital, the more restrictive the policy. Raise rates enough, and you can dramatically slow economic growth.
And the thing about interest rate policy is that it’s universal. A blunt weapon, if you will, affecting everyone from the individual to the largest corporation. If you borrow money, and most of us do, then your cost of funds will rise along with the Fed’s hikes.
But what if we’re in a unique situation? A place that America has never seen before. One in which we are being directed into a specific, high-cost economy designed to promote a social objective.
That seems to be exactly what two members of the Biden Administration are telling us. Jennifer Granholm, the Energy Secretary, is on record as declaring this time as “the beginning of one of the most significant events in human history.”
And just what is that event? Why it is the transition away from fossil fuels. And from Granholm’s perspective, this transition: “can’t progress fast enough.”
While Peter Buttigeig, the Transportation Secretary, has been strongly advocating that everyone start driving electric vehicles.
And no matter how you feel about this objective, the transition to “greener” energy, there is no doubt that this is a costly proposition.
Just two weeks ago, we had the latest announcement of the Consumer Price Index, the nation’s most widely watched measure of inflation. As you’ll recall, the CPI came in at a stunning 9.1% annual inflation rate. The highest in 40 years.
Each month as they’ve done for many years, the Bureau Of Labor Statistics calculates and publishes this report. And you can find it on their website: bls.gov/cpi. And in the latest news, the BLS tells us what is causing inflation.
Drum roll, please. Inflation is principally due to the price of energy, from the gas pump to the electric switch on the wall. Energy is up at better than a 40% annual rate. Energy directly represents over half of today’s inflation. Put another way. If the price of energy had remained constant this year, inflation would currently be only about 4%, not the 9% were enduring.
So imagine, if energy were constant, inflation would indeed be “transitory,” to use the term the Fed was throwing abound early in the year.
But inflation is not transitory because another transition is underway—an energy transition from relatively inexpensive traditional fuels to high-cost green alternatives.
This new “transition” is not our country’s historic free marketplace at work. It is a carefully orchestrated and choreographed move by a President who has promised to do away with fossil fuels entirely. Think it’s an accident that pipelines are halted, leases canceled, or federal lands put off limits? It’s no accident. It is all part of the transition to green energy. And all this at the behest of President Biden and his Administration.
This Biden Transition is placing a tremendous burden on our economy.
So, let’s look at this financial and economic burden in light of the Federal Reserve’s future decision on interest rates if roughly half of our current inflation originates from energy prices. And if those higher energy prices are the direct result of the Biden Energy Transition? Then how can higher interest rates help?
Given that Energy Cost drives today’s inflation (CPI)? And given that the President’s “transition”(to new energy sources) raises our Energy Costs. Wouldn’t it make sense for someone in Washington, perhaps even the Fed, to question his reckless policy?
For too long, we, the people, have been asked to: “ignore that man behind the screen” (movie: Wizard of Oz). The reality is that Biden and his administration are the principal cause. They have created this inflation. And only when they stop this ill-conceived transition will inflation improve.
Inflation is their policy.
On this day before the Fed’s big interest rate decision, we should have one of the most sensitive of all indicators reporting. In just a little bit, we will get the latest report on the Case Shiller National Home Prices. Last Month this index reported a record high. The combination of runaway inflation and low-interest rates has been intoxication for real estate. Nationwide prices last Month were up more than 21%, with three communities: Phoenix, Miami, and Tampa, all up more than 31%.
Today’s Case Shiller Report is liable to be a benchmark and a level that’s not been repeated for some time. It’s indeed been an incredible run for real estate. The question is, will that real estate bull market run into headwinds when the Fed raises interest rates tomorrow? Interesting question.
In other real estate news this morning, new home sales will be reported shortly. Wall Street expects to see about 660k homes sold in June. If this turns out to be the case, it would be about 180k homes less than the torrid pace set last December.
Finally, we’ll get a critical survey from the Conference Board. It will be their measure of consumer confidence. Expected to show a slight decline, it is still a reasonably strong reading, somewhere around 98.
In earnings so far, reported times have been good for the fast food establishments. With both Coca-Cola and MacDonald’s reporting solid earnings, their shares are trading higher in the pre-market.
And then, after the market closes, the big guns report. Leasing off will be Microsoft, followed by Alphabet/Google, and Visa. You can bet that analysts will be staying late in their offices tonight to catch all of these conference calls.