The Federal Reserve announced last Wednesday that the federal funds rate is being raised from 2.25% to 2.5%. Here is a comment from the Federal Reserve:
The Committee judges that some further gradual increases in the target range for the federal funds rate will be consistent with sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective over the medium term.
In view of realized and expected labor market conditions and inflation, the Committee decided to raise the target range for the federal funds rate to 2-1/4 to 2‑1/2 percent.
I know for sure that this is subterfuge. The only thing the Fed looks at is employment. If employment gets too high, the Fed’s main objective is to cut back on employment by raising interest rates. Raising interest rates cuts back on investment (interest is the price tag on borrowing money for investment), and in my opinion, investment is what really gets people employed; for instance, investment in oil drilling, plants, factories, pipes, instruments, roads, office buildings, etc.
The reason the Fed targets employment is because when there exists a tight job market, the employee can bargain for higher wages, not to mention better treatment and working conditions. Rising wages, in the Fed’s opinion, causes inflation since workers are seen as a “resource cost”. That cost is passed along to the consumer and you get inflation – in the eyes of the Fed.
But I say, what’s wrong with a little inflation? What is wrong with a little money being transferred from the rich to the poor? Can someone having a job ever be a bad thing? Apparently, if too many people have a job, the Fed thinks that is a bad thing.
Above is a chart of historical inflation. I attended high school from 1975 to 1979 and let me tell you, life was great. Money was flowing through the community – everyone had a job. There was plenty of money for the school materials, sports uniforms, football stadiums, school dances and formals, and not to mention pizza with friends on weekends. I enrolled in a private college in 1979. In 1982 my mother was laid off from Brown and Root after 10 years of service. In 1990, my parents foreclosed on our home of 13 years. The rest is history.
Since Paul Volcker became Fed Chairman in 1979, the Fed has been obsessed with inflation and their main tool to address inflation is to attack employment with interest rate hikes. The Fed target inflation rate is 2%, and as you can see from the chart, they have done a pretty good job.
Fiscal policy comes from the President and Congress. Monetary policy is directed from the Fed. For decades, these policies are often conflicting. Meanwhile, jobs are taken by immigrants at the top and the bottom of the employment food chain (where is the wage pressure on inflation?). Students cannot afford college – many attend community college just to save money. Teachers have to pay for school materials from their own pockets.
Our government has to help the US worker and not see the worker as an enemy to the economy. The Dow Jones Industrial Average is down about 1000 points since the interest rate announcement. This is because the market knows that investment is purposefully being restrained.