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BA Deere
Honored Advisor

Shouldn`t Fed cut rates to lower inflation?

This inflation has been mostly from too few to no goods (supply side) being chased by dollars out of necessity.  If rates were cut, that would allow factories to expand and flood the market with cheap goods.   If factories can`t hire workers, factories could invest in automation with borrowed capital.   

I guess I don`t see the logic in raising interest rates to purposely tank the economy in order to lower inflation.  The economy is much different than the 1980s when Paul Volker was at the helm.  The national debt is  currently 125% GDP in the 80`s it was 35% of GDP .  Plus countries around the world don`t have the luxury of purposely tanking their economies by raising their interest rates, to them it would be a death knell.  And they are customers of one of the US`s few exports, agricultural products. 

15 Replies
Hobbyfarmer
Honored Advisor

Re: Shouldn`t Fed cut rates to lower inflation?

Do u like the current upward spiraling costs for everything?

Are you keeping up with inflation on the income side?

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erikjohnson61y
Esteemed Advisor

Re: Shouldn`t Fed cut rates to lower inflation?

BA - The correct definition of inflation is NOT prices going up - it is the money supply going up, and specifically going up faster than the economy as a whole. If there is more currency for the same amount of goods, it takes more currency to buy those same goods.

Banks create this additional money by lending. So, lower interest rates make more projects/purchases affordable (less interest expense) and make prices rise because there is more competition for the goods that are available. Raising interest rates makes marginal projects/purchases economically unworkable, slowing demand, resulting in lower prices, if normal supply/demand dynamics are working. 

The part where we got screwed is that much of the additional money the fed has printed to pay for the mostly wasteful $8 trillion in excess spending since the start of the pandemic went into the financial markets - stocks - which are mostly owned by the elites that make the rules (either in congress or those who tell congress what to do). I am somewhat happy to see their fortunes reversed (Zuckerburg has "lost" over $60 billion in paper wealth) as this gigantic bubble in everything deflates. 

If Powell can stick to his guns (I have my doubts), then in a few years stocks and land will be more affordable and you'll actually get interest on your savings accounts again and price increases (what the media calls inflation) will be back down to 2% or so.

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BA Deere
Honored Advisor

Re: Shouldn`t Fed cut rates to lower inflation?

I humbly say that currently I`ve never had it better.  My question is though, is raising rates the answer for "this type of inflation"?     PPP loans were sent out 2 yrs ago, stimulus checks sent, cars were bought, decks were built (with $12  2x4s)  people "quietly resigned"  but that money is gone.  Lumber came back down, those who quit are slowly looking at the help wanted ads.  I think we just need patience, like if you broke your leg a month ago you won`t be running a marathon tomorrow but maybe next spring it`ll heal enough.  

Some economists all along have said "watch out for deflation at the backend of this" and to purposely bring on a recession that may or may not do any good on inflation seems wreckless.  Also, assuming raising rates would stop inflation, don`t they say you need rates over the inflation rate?  Well a 9% Fed Funds rate would do some really bad things.

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BA Deere
Honored Advisor

Re: Shouldn`t Fed cut rates to lower inflation?

Erik, you bring up savings accounts, have we reached a point where "rent seeking" no longer works?  I recall the 80`s while farmers were going broke paying 20% interest, there were older folks locking in Money Market rates of 18% thinking they stumbled on a money tree.   I suppose back in the 1960s the banks paid 4% and lent out 8% money (on fractional reserves) God was in His Heaven and all was right with the world, but we ain`t in Kansas no more.  

I just don`t know how we go back to that "normal" $32 Trillion national debt currently ...ect  It seems savers are forced in the Wallstreet casino putting savings into stocks & bonds conservatively as they can. Just my 2¢

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k-289
Esteemed Advisor

Re: Shouldn`t Fed cut rates to lower inflation?

So  called  EXPERTS  profess  inflation ,   $upply  chain  ,  deficit$ ,  bla -bla -bla  === 

Running  to  one  side  of  the  ship ,  then the  other  ,  while  not  hearing  a  forecasting  word  about  it ( inflation ) from  folks  like  Ernie G  , until  the  horse  is  out  of  the  stable 1+  year  lateR  = = =

Bottom  1/3  of  the  economic  populous ,  easy  sale , suffers  the  brunt  of  the  storm ,  while  the  talkers  give  out  18  month , aged ,  statistical  economics = = =

Folks  at  the  boards  of  trades  professed  Diesel  $hortage  ,  which  never  materialized  at  the  pump ,  then  the  $hort  positions ( flipped  flopped ) from  Long ,  move  in ===

DUPED,   tends  to  be  a  hard  pill  to  swallow , with  a $uper $ize order of Red Green ''' E M O T I O N ''' ===

       

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Hobbyfarmer
Honored Advisor

Re: Shouldn`t Fed cut rates to lower inflation?

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rsbs
Senior Advisor

Re: Shouldn`t Fed cut rates to lower inflation?

I would like to see the scenario where the Fed can keep interest rates high, and we don't go into a prolonged recession/depression.

What is different now is the size of the national debt. Ten percent interest on 30 to 40 Trillion dollars is huge, and it puts confiscatory tax rates into play as well as cutting entitlement  spending. 

My bet is we see lower interest rates, high inflation, and the saver gets screwed. 

I remember the 1980s where I didn't bite and try to buy $3000 per acre land, at ten percent interest. I saved a few bucks, and when the crash came, I was positioned to buy $750 to $1200 per acre land instead. Has made a world of difference.

I don't see that happening this time around. Different players, different voters, different amount of debt load.

It is a not a good situation going forward.

k-289
Esteemed Advisor

Re: Shouldn`t Fed cut rates to lower inflation?

So  it's  time  to  sell  land  now   &  and  buy  back  twice  as  much  later  ?  ?  

Jamie    , Charles  , Jane  &  David , &  other   large  banking  heads in oversite  hearing  didn't  seem  to  want  consumers  cutting  up  their  credit  cards any  time  soon = = =

Even  touched  on  over-regulation ,  which  seems  interesting ,  of  which  raising  rates  , OR  lowering  rates , is  over regs - which  1  is  it  - ?  ?  ?

  When  posed  the  ?'s  on  """ banking fee'$ '''',  the   C E O  group  was  a  bit,  hesitant ,   in  response  = = = 

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Hobbyfarmer
Honored Advisor

Re: Shouldn`t Fed cut rates to lower inflation?

The sooner they realize you can't spend yourself rich the better off we all will become.

Credit card interest is basically loan sharking. 20%ish interest...