Download 12-page PDF: "The Plan, Parts 1 and 2" (June 29, 2024)
"The central bank's rate policies over the next several months could also have consequences for the presidential race."
We begin with a picture of the Biden inflation -- the blue line in the image below:
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| Figure 2.1: The Biden Inflation |
The blue line shows the Consumer Price Index (CPI) since June 2019. On the right, the plot window extends out to 2025 so the rise-and-fall of the Biden inflation is more or less centered on the graph. Dots on the blue line indicate monthly values for the CPI. Bigger gaps between dots indicate bigger changes in the rate of inflation.
The gray line that runs low from early 2020 to early 2022, and then rises, is the Federal Funds rate, the interest rate used by the Federal Reserve to keep inflation under control. The Fed raises the interest rate to slow the economy when prices start increasing at an unacceptable rate. The Fed lowers the interest rate when it wants the economy to grow faster.
The red line at the 2% level on the graph shows the Fed's 2% inflation target. The target is the maximum "acceptable" level of inflation. The rate of inflation varies, of course, but until 2021 inflation varied around the 2% level and was not generally seen as a problem by the Fed or in the news.
I stopped the red line short to make the graph less cluttered. The Fed still loves its 2% target.
The dashed red line shows that since June 2023 the rate of inflation has "stabilized" at a 3.3% annual rate. That could change tomorrow; I don't predict. But the past 11 months -- and as of 12 June, the past 12 months -- show inflation running near the 3.3% rate consistently. That is not something we hear in news reports and such:
CNN's "Facts First" of 14 May 2024 makes it sound as if inflation is still on the increase:
"The March 2024 inflation rate ... was about 3.5%, up from about 3.2% the month prior."
On 15 May 2024, Andrew Ross Sorkin showed up at Morning Joe to talk about inflation. The April data was just out. Sorkin said the monthly rate of inflation was 0.3%.[2]
"This is only one month's data," Sorkin warned. "We should not assume that it represents a trend."
Sorkin is right, of course: We should not assume that one month's data represents a trend. And yet his statement is nonsense. It was Sorkin who gave us one month's data. The BLS comes out with a new number every month. If Sorkin looked at the numbers, instead of ignoring them, maybe he would see a trend.
To me, the recent trend -- the dashed red line --
looks flat and stable at something over 3% annual. That's higher than
the Fed's 2% target. But the monthly reports indicate that inflation has
been stable for a year now. The monthly reports show that prices are consistently rising at a 3.3% annual rate, give
or take.
A 3.3% annual rate of inflation is quite a lot. But it's less than the
inflation that we had from April of 2021 to May of 2023. And it is not
really a lot more than the Fed's 2% inflation target. In addition, it is less than the 4% target economists considered in the wake of the financial crisis of 2008.
NOTE 2: The 0.3% number sounds low because it
represents change-from-previous-month data. It is more common to speak
of the change-from-year-ago rate, which is equivalent to twelve
monthly rates, compounded. For example, the 3.5% and 3.2% noted by First Facts are change-from year-ago values.
The Fed Was Behind the Curve on Raising Rates
To grasp the graph above, remember 3 dates: March 2020, March 2021, and March 2022.
March 2020: Covid. The Fed lowered the interest rate to zero because Covid was upon us.
March 2021: 12 months after the interest rate dropped to zero, Jerome Powell warned that inflation "moderately above 2 percent" was coming. Shockingly, after Powell's warning, interest rates remained at zero for 12 months more.
March 2022: One year after Powell warned of inflation, and with the annual rate of inflation at 8.5%, the Fed decided it was time to start raising the interest rate.
Consider that whole two-year period, from March of 2020 to March of 2022. We had two straight years with interest rates at zero, stimulating the economy out of a pandemic stupor. At the one-year mark, the Fed chairman warned that inflation was on the way. Then, a year after that warning, and with inflation at an outrageous 8.5%, the Fed at last decided it was time to begin raising interest rates to fight inflation.
That delay, that year-long delay after March of 2021, that is what allowed the rate of inflation to surge. It was this one bad policy decision, repeated over and over for a year, that was responsible for the Biden inflation.
Two more dates to remember: June 2022 and June 2023.
June 2022:
The Fed finally decided to start raising interest rates in March 2022. Three
months later, in June, inflation peaked. By July 2022, inflation was coming
down. The economy did not wait. The economy responded within three months. It was the Fed that dragged its feet.
June 2023: Exactly one year after it peaked in June
2022, inflation hit a hard bottom at 3.0% in June of 2023. It bounced
back up to 3.7% in August of that year, then settled down to around
3.3%. It is almost as if the economy found a "natural" inflation target. Maybe that sounds strange, but you can see it right there on the graph.
Since June 2023: The average of the 12 annual rates of inflation, from June 2023 to May 2024, is 3.3%. The highest of the 12 annual rates is 3.7%; the lowest is 3.0%. And Excel shows a linear trend line that slopes ever so slightly downward, suggesting that future rates will be lower. But I don't predict.
The Fed Is Behind the Curve on Lowering Rates
There is one more date worth noting.
August 2023: After inflation hit hard bottom in June 2023, the Fed
continued to raise interest rates for two more months. Since August, the interest rate has
remained unchanged at 5.33%. The most recent reading, for May 2024, is
still unchanged at 5.33% -- high enough that inflation is trending ever
so slightly down.
Low interest rates encourage economic growth but can stimulate inflation. Raising rates reduces inflation but can slow the economy. The unemployment graph at FRED shows gradual increase in 2023 and 2024. Unemployment is rising. That being the case, interest rates are probably too high.
It is difficult to see much detail in the FRED graph because of the Covid recession and 2020's monster increase in unemployment. To get a closer look, I brought the data since 2022 into Excel, and looked at the trend since January 2023:
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| Figure 2.2: Detail View, The Rate of Unemployment, Jan 2022 to April 2024 Linear Trend Line based on Jan 2023 to April 2024 Trend Line extended to December 2024 The small red dots indicate the data used to calculate the trend. Source Data: https://fred.stlouisfed.org/graph/?g=1oeJn View the Excel File at DropBox |
The detail view makes it clear: The rate of unemployment shows increase since early 2023. As I figured it, if the trend continued, the rate of unemployment would reach 4% in September 2024 (before the November elections) and likely go above 4.1% in December. But FRED came out with updated data before I came out with this post. FRED now shows unemployment already at 4% as of May 2024, after the 7 June data release.
The
one area where the Fed has not stalled economic progress is in letting
unemployment go up. But of course that means it has dragged its feet
when it comes to reducing interest rates to prevent recession.
MoneyWatch of 12 June 2024 reports:
The central bank's rate policies over the next several months could also have consequences for the presidential race. Though the unemployment rate is a low 4%, hiring is robust and consumers continue to spend, many voters have taken a dour view of the economy under President Joe Biden. In large part, that's because prices remain much higher than they were before the pandemic struck in 2020.
4% unemployment probably doesn't look "low" to the people who were laid off in May 2024.
It's
good they bring up "consequences for the presidential race" but at this
point we are late in the election interference game. It was the Fed's
refusal to lift interest rates above zero for a year that allowed
inflation to rise to 9%. That delay did tremendous damage to Biden's chances of re-election. And when you look at how the Fed dragged its feet for so
long, without raising interest rates at all, it becomes obvious
that the delay was almost certainly a scheme of planned election
interference: It was the plan.
And now, when interest rates should be coming down, the Fed is dragging its feet again, keeping interest rates high while unemployment rises. At some point, it will be too late to prevent the approaching recession. Donald Trump has already predicted a "crash" and mentioned Herbert Hoover, as if he foresees something akin to another Great Depression.
"A crash, however, seems increasingly unlikely", according to FOX2now.
In April 2016 Trump predicted a "massive recession". In June 2019 he predicted "a market crash" if he didn't win the 2020 election; in August of that year he downplayed the odds of a recession on his own watch; and in October 2020 he said a Biden win "would unleash an economic disaster of epic proportions". In July 2022 he "warned that the nation could enter an economic depression due to the fiscal policies of President Joe Biden." In December 2023, Rolling Stone reported "Donald Trump warned that if he was not elected president in 2024, the U.S. would see its economy plunge into a “1929”-era depression." In January 2024 Trump said he didn't want to be another Herbert Hoover. And in February it was the market crash again: "If we lose, you’re gonna have a crash like you wouldn’t believe... the largest stock market crash we’ve ever had."
Maybe Trump got tired of being wrong, and decided to talk the Fed into doing some election interference: Just delay the interest rate hike, just delay it a little. And inflation went up-up-up. And then: Don't lower interest rates yet, inflation is still high at 3 percent. And unemployment is going up-up-up. And this is all standard policy stuff for the Federal Reserve, except the year-long delay that let inflation rise to 9 percent, and except for the current delay that has unemployment going up.
First the inflation. Now the unemployment. The dual mandate is in shambles.This didn't happen by chance.
Don't let anyone get away with election interference. Don't let the Fed create a recession to fight 3% inflation. And don't forget that inflation, which peaked at 9% in June 2022, was created by the Fed holding interest rates at zero for 24 months -- a policy that can only be explained as the work of idiots, or the result of election interference.
Summary
In March of 2020, to support our economy and keep it growing, the Federal Reserve reduced interest rates in response to Covid. One year later, in March of 2021, Jerome Powell issued a warning: Inflation is coming!
Another
year went by, and during that year the predicted inflation came to pass. In March of 2022, after a full year of rising inflation, the Fed at last started to raise
interest rates. Within three months of that first
increase, inflation peaked and started to fall. Within three months.
The economy has been responding in a timely manner; the Federal Reserve has not.
This is why the inflation was as bad as it turned out to be: because the Fed chose not to respond until inflation had been rising for a year. The Fed could have nipped inflation in the bud, but chose not to do so. The Fed failed to respond in a timely manner.
If that's not bad enough, we now have a follow-up problem: Interest rates remain high, even though inflation is far below the 9% peak. Once again, the economy responded promptly, and the Fed did not. Interest rates must come down so recession can be avoided. But the Fed appears prepared to wait until the recession is upon us in full force, and only then will it be willing to reduce interest rates.
Since the Biden inauguration, Fed policy has been nothing but election interference. It is as if the whole plan was designed and orchestrated by Donald Trump -- the delays before implementation of policy, the impending recession, the raging inflation, all of it. Did Trump orchestrate these economic problems?
Who benefited from the raging inflation? Not the woke nor LGBTQ. Not the Black nor Latino. Not women nor the left-handed. Not even the MAGA benefited by the inflation. And not Joe Biden. Only Donald Trump stands to gain by it.
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