Let's Get Serious

Federal Reserve Chair Jerome Powell indicated strongly last week that the Fed will likely raise interest rates by 50 basis points at its next meeting on May 3-4. It will likely get more aggressive in its fight against 8%-plus inflation. It’s going to have to because just as fast as the Fed is trying to bail water out of the boat, the White House and Congress are determined to keep pouring it in.

“It is appropriate in my view to be moving a little more quickly” to raise rates than the Fed has recently, Powell said last Thursday at an International Monetary Fund event. “Fifty basis points will be on the table for the May meeting,” he said. That would double the 25-basis point increase at its March meeting, which now looks relatively puny compared to the yield on the 10-year Treasury, which is rapidly approaching a three-handle for the first time since 2018.

St. Louis Fed president James Bullard, suddenly the most hawkish voting member on the Fed’s monetary policy committee, said he thinks a 75-basis point hike is more appropriate. However, he conceded that “more than 50 basis points is not my base case at this point.” Still, 50 bps is a lot better than 25 bps in bringing the Fed’s target closer to the so-called neutral rate, which is when Fed policy is neither accommodative nor restrictive, and the Fed is nowhere near that (although no one really knows what the magic number is). With six more meetings to go this year, including May’s, 50 bps at each meeting would push the fed funds rate above 3%.

That seems awfully aggressive, given the Powell Fed’s generally dovish inclinations. Still, it may have no choice given that the Biden Administration and its acolytes in Congress are pushing for even more stimulative policies, not less, as they face a growing likelihood of an electoral wipeout in November. Indeed, according to one of its leading lights, the problem isn’t that the government isn’t spending too much; it’s that it’s not spending nearly enough. And naturally enough, that spending has no effect on driving up inflation, in their eyes. Inflation may be a problem, but it’s surely not Washington’s fault.

Last week the New York Times handed a platform to Massachusetts Senator Elizabeth Warren. In a piece entitled “Democrats Can Avoid Disaster in November,” Warren argued that the problem isn’t too much spending by Washington but too little.

“While Republican politicians peddle lies, fear, and division, we should use every single one of the next 200 days or so before the election to deliver meaningful improvements for working people,” she wrote. “If we fail to use the months remaining before the elections to deliver on more of our agenda (emphasis mine), Democrats are headed toward big losses in the midterms.”

In Warren’s mind, the “urgent challenges we face are climate change, income inequality, and systemic injustice.” Inflation barely warrants a mention from her, except to attribute it to “pandemic disruptions to global supply chains and Vladimir Putin’s war in Ukraine.” Not to mention greedy corporations, who are “jacking up prices to boost their profits.” She would punish them by instituting a “global minimum corporate tax.”

And, of course, she lobbies for student loan debt cancellation, which she claims Americans support by “two-to-one,” with the minority presumably including those saps who took out loans and were dumb enough to pay them back. Moreover, she says President Biden could cancel student loan debt by executive privilege “with the stroke of a pen,” although she doesn’t say why he hasn’t done so.

(It’s perhaps noteworthy that before she became a senator, Warren was a purported expert on personal bankruptcy, which she almost never blamed on the people who borrowed the money).

But it’s probably only a matter of time before Biden does. The Wall Street Journal reported last week that White House Press Secretary Jen Psaki teased that the moratorium on student loan repayments, only recently extended by Biden for the umpteenth time until August, will “be extended again or we’re going to make a decision” about “canceling student debt.” October surprise anyone?

So, as I’ve written before in this space, the Fed is not going to get any help from the fiscal authorities. Just as fast as the Fed removes dollars from the economy, the White House and Congress shovel even more in. This means even higher inflation and higher interest rates at a faster pace going forward.

If you’re a saver and looking to return to the halcyon days of 5% yields on bank certificates of deposit, this is good news for you. But if you buy groceries or gasoline or need a mortgage to buy a home, not so much. Just remember come November how it came to this pass.

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George Yacik
INO.com Contributor - Fed & Interest Rates

Disclosure: This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.