Are Interest Rate Hikes Really Meant to Tame Inflation?

Feb 23, 2023 | Bubble Monitor, No Bull Economics

Bubble Monitor Chart
Bubble Monitor Chart

Based upon initial 4Q22 corporate results, it looks like the U.S. economy has got some legs. Inflation is peaking & the ongoing supply chain recovery should further help prices. Margins are starting to come back. Hopefully, this momentum will not get derailed by the government’s ill-conceived geopolitical objectives.

Rate Hikes Won’t Help Egg Prices

At first glance, the historical correlation of the Fed Funds Rate vs. inflation (CPI-U) points to much higher interest rates – very bad news for the market! This is especially true when considering that the current CPI number (+6.4%) seems to be missing the reality of actual price inflation (especially on the food side). According to Walmart, food inflation has been running mid-double digits over the last 2 quarters, with 200% egg inflation in January down to an affordable 50% currently (see this post).  

Given this, why is it that the Fed is becoming more dovish with the current Fed Funds Rate at a historically moderate level? We’re not complaining!  As we have repeatedly pointed out, higher interest rates will do nothing to reduce the price of eggs which is actually the result of a supply problem as discussed in this post

So, what is going on here? Even though higher interest rates may not be able to tame supply-side inflation, they are necessary to defend the US$ and to provide a cushion in the case future rate cuts are needed for an economic shock. While it’s not a bad thing to be fiscally conservative, these moves could be a very bad thing if they are meant to support the government’s extremely unwise saber-rattling. Let’s avoid war & stay focused on rebuilding our economy – that’s enough work for a lifetime!

Fed Funds Rate Graph
Fed Funds Rate Graph
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