Governors of the Federal Reserve Bank will meet again today, deciding whether or not to change their Fed Funds interest rates. Their decision is due this afternoon.
It’s widely expected that they’ll hold rates steady in a game of wait and see. The question for many is whether or not they’ll wait too long given recent inflation data.
Economists had expected inflation rates to be at 3% by the end of last year and further down in the 2.5% range by the end of this one. Instead inflation rates ticked up in January and February causing economists to adopt a higher for longer perspective.
If the Fed waits too long to drop interest rates, it will inadvertently cause a recession.
This is a sort of high stakes poker game. Exactly how long they hold ’em or fold ’em has everything to do with whether or not millions of Americans will become unemployed and how much your 401K might plummet.
Uninformed opinions would tell the Fed to drop the rates now. But doing so might lead to another major inflationary period, if inflation hasn’t actually been tamed.
And if prices again rose. it would force the Fed to again raise interest rates to get it back under control. This is a mistake the Fed made back in the 70’s which did nothing but lengthen the pain of a poor economy for the whole country. As such, they’ve adopted a higher for longer strategy.
To put this into perspective, let’s look at the current economies of other wealthy countries
The world’s other major economies have already fallen behind the US..The U.K. and Japanese Economies declined in the fourth quarter while America’s grew. For example, England’s fell by 1.4% while ours rose by 3.3%.
By just about any standard, our economy is still cooking way too hot.
The European Central Bank has already announced that if their inflation numbers continue to drop as expected, they’ll be able to begin reducing their interest rates this June. Of course our Federal Reserve has adopted a wait and see attitude.
Let me leave you with this…
Please remember that this inflationary period began by the overspending and record deficits of the pandemic. So much money was pumped into our economy that demand increased to a point that pushed up prices.
This phenomenon was only exacerbated when a bi-partisan congress approved the last two years of spending bills, further creating higher than normal deficits and more inflationary pressures on prices. As such, the Fed’s historical increase of interest rates has not yet had its desired effect.
When you add in the fact that we’re in a national election, the future becomes rather murky.
Our administration knows that presidents don’t get re-elected in a recession. As such, they’ll do anything they can to stop a recession including but not limited to pumping even more money into the economy.
The administration’s stance on forgiving student debt is just one example of this. The question then becomes what does this mean for the foreseeable future?
Probably higher for even longer.
As entrepreneurs, no one wants to deal with higher interest rates. It means that many of your projects will need to be put on hold even longer.
Be careful. I wouldn’t be in a hurry to make a mistake. There’s still a 50/50 chance that our economy will recess.
And no one wants to start anything new during the dreaded “R” word.
Whatever the future holds, know that you aren’t in this thing alone. If you need to talk, you know my number.
We’re all going to get through this. Let’s get through it together.
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Note that the only professional services provided by Accounting Solutions Ltd. are those specified in a written communication from our office detailing the scope of services to be rendered and the terms and conditions applicable to the engagement.