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Yanking the Band-Aid Off

06/13/2022

Last month, I was hoping the Fed would increase interest rates by 75 basis points or three-quarters of one percent.  Unfortunately, they only raised it by 50 bps or one-half of one percent.

This week, the Fed is likely to raise interest costs another 50 bps, which will disappoint me again.  I hope they increase rates by 100 bps or a full percentage point.

So, why do I want larger and faster interest rate increases?

One reason is that the Fed was late to the party and needs to catch-up, although that makes a “hard landing” (think:  recession) more likely.

A more important reason is inflationary expectations – if people believe interest rates are going up, it becomes a self-fulfilling prophecy, and the Fed loses both control and respect.

The Fed knows interest rates must increase . . . but missed the urgency of doing so.

There is no economic datapoint more closely watched by consumers than the inflation rate.  They always over-react, and some even dust-off their panic-button, just in case.

A higher interest rate decreases corporate profits and hurts home-buyers, neither of which is good for the stock market . . . in the short run.

The only sure-fire way to stop inflation is causing a recession.  Fortunately consumers are less afraid of recessions than inflation.

The best way to prevent inflationary expectations is staying ahead of inflationary increases – slowly if you can, rapidly if you must . . . and the Fed must!

 

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