There was a time | Seeking Alpha

INFLATION word on calculator in idea for FED consider interest rate hike, world economics and inflation control, US dollar inflation

Khanchit Khirisutchalual

There was a time when our politicians, believe it or not, were Americans before they were Democrats or Republicans. I am afraid, however, that that time is unfortunately over. Now, it seems that your political affiliation is at the head of the flagpole, and that doing the right thing for the United States – regardless of the ceaseless rhetoric – comes in at second place. I have been saddened to watch this unfold, and I am sadder still as it plays out each day in the media, which used to report the news and now seems to report very little besides opinion.

The effects of all of this are not good for our country, or for our economy, or for our markets. That is my take on all of this continuing nonsense. I am quite proud to be an American, but I am certainly not proud of what is going on in Washington, DC these days.

I have read the “Inflation Reduction Act” several times. I can only shake my head in wonder. This Bill might as well be called the “Dorothy and Toto Return from the Emerald City Bill” for all of the impact that it will have on inflation.

The Penn Wharton Budget Model concluded it would slightly increase inflation until 2024, and then decrease it slightly afterwards. In total, the group says it has little confidence it will impact inflation at all in either direction. The nonpartisan Congressional Budget Office, which also scored the Bill, determined that the Bill will have a “negligible effect” on inflation this year and next.

Although inflation eased somewhat last month, it is still at 9.15% the way I calculate it. I take the average of the PPI Index and the CPI Index to identify that number, as I also point out that the Producer Price Index is the leader of the two indexes, as production leads consumption. While oil and natural gas and gasoline have ebbed slightly, food prices jumped 13.1% in July, the biggest one-year increase since March of 1979, according to CBS News.

July’s increase in food prices represents the seventh consecutive monthly increase of at least 0.9%, the Labor Department said last week. Food at home, or meals prepared from grocery purchases, rose 1.3% last month, with all major grocery store categories seeing price jumps, the government said. The food item that has jumped the most in price was eggs, with a 38% surge in July, compared with a year earlier. But many other food products also saw double-digit increases, including coffee, up 20%, butter, up 22%, and flour, up 23%, according to data from the government.

I point all of this out today not as a standalone item but because of its likely effects on the markets. Due to inflation, the Fed at its last meeting decided to raise their benchmark interest rate by three quarters of a percentage point for a second straight month. This is the fastest pace of tightening since the early 1980s. The FOMC minutes, due out at 2 PM on Wednesday, probably will cause some fuss in both the equity and bond markets. They could indicate what kind of data Fed officials would need to see to favor another “unusually large” increase – which Chair Jerome Powell, at a press conference following the July meeting, said could be on the table for the September 20-21 gathering as well.

Minneapolis Fed President Neel Kashkari, who prior to the pandemic was the central bank’s most dovish policymaker, said last Wednesday that he wants the Fed’s benchmark interest rate at 3.9% by the end of this year. Then he went on to state that he wants to see it at 4.4% by the end of 2023. His Chicago counterpart, Charles Evans, recently stated that inflation remains “unacceptably high.” He said he expects “that we will be increasing rates the rest of this year and into next year to make sure inflation gets back to our 2% objective.”

San Francisco Federal Reserve President Mary Daly, in her remarks after the CPI print, said that it was far too early to “declare victory” in the central bank’s inflation fight. She didn’t rule out a third consecutive 75-basis point increase in September and pushed back on investor expectations of a turn to rate cuts in 2023, while signaling support for a slowing in the pace of rate hikes.

I continue to point out that these kinds of rate hikes will also increase borrowing costs substantially. This will have a significant negative impact, in my opinion, on America’s borrowing costs, on corporate revenues and profits, mortgage rates, real estate costs and prices, high yield bonds problems, bankruptcies, mergers and acquisitions and stock buybacks, along with the new tax on them in our so-called “Inflation Reduction Act.”

As the Fed raises rates, lending costs also rise, and yet the members of the Fed make no comment about this, nor does it seems to be a part of their thinking. The bond and equity markets, however, will include it in their thinking, I can assure you, as our flummoxed markets continue unabated.

“Watch out now, take care
Beware of greedy leaders
They take you where you should not go
While Weeping Atlas Cedars
They just want to grow, grow and grow
Beware of darkness…”

– Eric Clapton

Original Source: Author

Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.

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