LOS ANGELES.–Expecting the Federal Reserve Board to cut interest rates at least three times in 2024, a recent report on the Consumer Price Index [CPI] at 3.5% was greater than expected, prompting 71-year-old Fed Chairman Jerome Powell to put a damper on lower rates. “The recent data have clearly not give us a greater confidence and instead indicate that it’s likely to take longer than expected to achieve [2% inflation]” Powell said yesterday. Wall Street’s Dow Jones Industrial Average has dropped 1500 points since the 3.5% CPI reported April 9. What happens to Wall Street now is anyone’s guess but many analysts predict a steady drop in market averages. President Joe Biden, 81, keeps touting the low employment rate as proof of a strong economy, despite that fact that inflation still looms over the economy, leaving Power and his Open Market Committee reluctant to cut rates.
Today’s Federal Funds Rate at 5.33%, the rate the Fed charges commercial banks, has drivne the Prime Interest Rate to 8.5%, the highest rate in 23 years, causing pain for consumers, especially for new-and-used car buyers or, more importantly, homebuyers who’s average 30-year mortgage interest rates average over 7.5%, literally 300% higher than late 2020 or early 2021. Mortgage rates aren’t expected to go down to those pandemic levels anytime soon but they could drop 25 to 50 basis points if Powell starts cutting the federal funds rate. Powell said he can’t control for geopolitical factors like the Ukraine War, where Biden finds himself funding a proxy war against the Kremlin. Biden never talks about how the Russian oil embargo and Ukraine War fueled the worst inflation in over 40 years. Powell doesn’t talk about possible causes, only what the numbers say.
When you look at when the inflation started, it began Feb. 24, 2022 when Russia moved its military into Ukraine. Biden promised to apply the most punitive economic sanctions in history to 71-year-old Russian President Vladimir Putin Biden promised he’d bankrupt the Kremlin and degrade the Russian military to the point Russia could no longer wage war. All of Bidien’s forecasts proved false, with Putin selling more oil and natural gas than ever, after the European Union decided to look elsewhere to buy petroleum and natural gas. Biden’s Russian oil embargo was the single-most significant event fueling inflation. Powell has no control how Biden and the Congress spend money, especially trillions of dollars in pandemic relief and a trillion dollar infrastructure bill. Former Treasury Secretary Lawrence Summers warned Biden May 27, 2021 about fueling runaway inflation.
White House officials act like there’s no known cause for the current bout of inflation, when, in fact, it can be traced to stimulus funding and the Feb. 24, 2022 Ukraine War. Asking for another $60 billion in Ukraine funding, Biden shows no intent of ending the war anytime soon. Unless there’s a decisive move to the peace table, American investors can expect high interest rates for the foreseeable future. Watching the Dow plummet with the tech-rich Nasdaq close behind, shows that Wall Street already sees the effect on share prices of continued high interest rates. Whatever’s left of the money supply from pandemic relief and infrastructure spending, it’s bound to start disappearing, causing more pressure on employers to start shedding jobs in the quarters to come. Biden doesn’t see the harmful effect of the Russian oil embargo on world markets.
When you add to the current global economic picture supply chain problems in the Red Sea because of Houth attacks on commercial shipping, it’s fueling inflation by adding to the costs of delivering goods, now requiring shipping companies to take weeks longer bypassing the Red Sea and sailing goods through the Cape of Good Hope. Shipping problems in the Red Sea already shut down the Tesla plant in Berlin, because of supply chain interruptions. “There is a risk there that if the Fed doesn’t decrease rates, market prices will decline,” said Itay Goldstein, Warton Finance professor. Any serious or lasting stock market sell-off could add to an economic slowdown, causing the government to collect less taxes, adding to the federal budget deficit and $34 trillion national debt. Consequences of prolonged high interest rates can wreak havoc in an already unstable economy.
Prolonged higher interest rates “will increase borrowing costs across the economy, which is likely to have a negative impact on consumer spending, business investment, and the housing market,” said Brian Rosse, senior U.S. economist at UBS Global Wealth Management. What does anyone have to do to convince Biden that the Ukraine proxy war and Russian oil embargo is killing the U.S. economy? Low unemployment won’t last forever, especially giving that data reflects more part-time employment in the fast-food and agricultural industry, largely employing undocumented workers or at least newcomers. “We think the economy is strong enough that it doesn’t need cuts to avoid recession,” said Daivd Miricle, chief U.S. economist at Goldman Sachs. Whatever the rosy forecasts, there’s only so much high interest rate stress the U.S. economy can take before its slows down.
About the Author
John M. Curtis writes politically neutral commentary analyzing spin in national and global news. He’s editor of OnlineColumnist.com and author of Dodging The Bullet and Operation Charisma.
