The Fed’s Customer Satisfaction Score

May 8, 2024 | Finconomics 101, No Bull Economics

Elevated Rates Not "Curing" Inflation Post Banner

Powell is perhaps the most powerful non-elected official (or elected for that matter), maybe just behind Sir Anthony Fauci (remember him?). To whom do we submit a complaint?

To Whom This May Concern:

  • The Fed recently decided to postpone a badly needed interest rate cut because of concerns about persistent inflation. 
  • However, if the Fed subscribed to NoBull, they would have learned 2 key takeaways from McDonald’s 1Q24 results: (1) capitulating lower-income consumers have given up on the largest fast-food chain as they now can only afford to eat at home; and (2) most of the U.S. restaurant industry pricing is carryover pricing, as opposed to new price increases. 
  • So not only are restaurant menu prices not inflating, but McDonald’s decision to double down on value is effectively ushering in a deflationary force.
  • In the meantime, the Fed’s elevated interest rates are pressuring the banks while also bankrupting the Federal Government (which is struggling to service its bloated debt load).
  • In any case, we would like to point out the obvious – the best way to lower prices is by increasing supply as opposed to crushing demand.
  • But let’s conduct a thought experiment for the Fed’s benefit: what happens after demand is crushed by high interest rates? Shouldn’t we expect demand to eventually return after the recession/depression to similar levels? What if the population increases during the downturn? In that case, demand could return at an even higher level.
  • Of course, supply will shrink during an economic downturn, putting the economy in a bad position as demand returns to a possibly higher level. Resultantly, we see the seeds of a recurring inflationary cycle driven by overly simplistic efforts to throttle demand to deal with inflated prices.
  • Until the market finally accepts that inflation can only be “cured” by increasing supply (something outside of the Fed’s purview), we are simply kicking the inflationary can down the road while punishing the most vulnerable debtors along the way.  

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