Hi. Art here.
I renamed this series of posts from "Throwback" to "The Plan".
I'm keeping the 'throwback" link for this message,
and moving the content to a new link. The new link is
https://econcrit.blogspot.com/2024/06/the-plan-part-2.html
If you share the link, please share the new one!
After a day or two, I will keep the above message and delete the content below.
"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 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 reveres the 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 numbers indicate that inflation has
been stable for a year now, with prices rising about 3.3% a month, give
or take.
3.3% per month is 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 2%.
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, based on twelve
monthly rates compounded. For example, the 3.5% and 3.2% noted by First Facts are change-from year-ago values.
On Raising Rates the Fed Was Behind the Curve
There are three dates to remember: 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: Powell warned that inflation "moderately above 2 percent" was coming.
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 decided it was time to begin raising interest rates, to fight 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 2022, inflation peaked. By July it 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, to go along with the natural rate of unemployment.
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.
On Lowering Rates the Fed Is Behind the Curve
There is one more date worth noting.
August 2023:
For two months after inflation hit the hard bottom in June 2023, the Fed
continued to raise interest rates. 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: The Rate of Unemployment, Detail View, 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.
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 raise interest rates above zero for a year that allowed inflation to rise to 9% and did such damage to Biden's shot at re-election. And when you look at how the Fed dragged its feet for so long before without raising interest rates at all, it becomes obvious that the delay was almost certainly a scheme of planned election interference.
Now, when interest rates should be coming down, the Fed is dragging its feet again as unemployment rises. At some point, it will be too late to prevent the approaching recession. Don't let this happen, and don't let anyone get away with it.
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 passed, and during that year the predicted inflation came to pass. After a full year of rising inflation, the Fed at last started to raise interest rates in March of 2022. 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 failed to do so. It failed to respond in a timely manner.
If that's not bad enough, we now have a follow-up problem: Interest rates are high, and they remain high even though inflation is far down from the peak. Once again, the economy has responded promptly, and the Fed has not.
The economy responded promptly, with inflation falling to 3% by June of 2023, and settling down since that time to a trend that is comparable to a 3.3% inflation target -- as the graph up top shows. But the Federal Reserve has not responded by reducing interest rates, not even once in the year since June 2023. The Fed is again dragging its feet.
Interest rates must come down so that a recession can be avoided. But the Fed appears to be prepared to wait until the recession is upon us in full force, and only then will it be ready to reduce interest rates.
Jerome Powell has said over and over again in the past year that the Fed is waiting for inflation to come all the way down to where it fits the 2% target. So far, inflation has continued to behave as if the target is 3.3%. But the Fed continues to hold out for 2%, so our economy continues to move toward recession.
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