When Federal Reserve chair Jerome Powell gave his press conference Nov. 2, the Fed having just raised its Federal funds target rate by 0.75% to the range of 3.75-4%, he blew away the supposedly “crucial” question of whether the Fed would match that increase again in December, or would make the much-desired “pivot” to a mere 0.5% increase to end the year. This obsession of those who live and die by the stock market was swept away, when Powell said, in effect, that the Federal Open Market Committee was planning to keep raising rates steadily into 2023, with no “pause” yet in sight.
What’s being accomplished by this? Certainly not the control of inflation. The Federal Reserve governors have plenty of data, and they know full well that the costs of all forms of credit continue to run away. Credit cards bear an all-time record average interest rate of 24%. The average auto loan for a new car, according to Edmunds.com, is now up to 6.3%, on an average price of $40,438 (that’s a $1,000/month payment); the average used car loan has an interest rate of 10.33%. The average 30-year fixed mortgage bore a rate of 7.13% at the end of October compared to 3% in the early Spring, dealing a knockout punch to the real estate market. While none of these costs are counted as “inflation” in the Consumer Price Index, the great majority of Americans continue to suffer loss of real income from them. Business lending for smaller and medium-sized companies, much of it tied to the 2-year Treasury note rate which has more than doubled, have gotten far more expensive, and capital spending has suffered, along with labor productivity, which is at rock bottom.
So no, the Fed is not “controlling” services inflation by raising rates this way, but the opposite.
What, then, goods inflation? Here there is chaos. Producer goods and factory goods are still inflating rapidly; energy product prices are either dropping dramatically due to austerity (declining use) and lack of refining capacity (natural gas, gasoline) or spiking upwards due to shortages (diesel fuel). Food products are still inflating strongly, except that grocery chains are marking them sharply down because they know their customers are broke from inflation! Walmart is offering “everything for Thanksgiving at last year’s prices,” for example.
