U.S. Fed Rate Hikes Working

Nov 2022

A s the U.S. Federal Reserve board has continued interest rate hikes (beginning March 16th) as tool to combat
soaring inflation, their tactic is working as planned: business and household spending on goods has declined,
shipping rates are coming down, car and home sales are declining in both price and volume, and even most
commodity prices are now below year ago levels (yet WELL ABOVE the pre-COVID levels).
Interest rate hikes are used to slow the velocity of money. They remain an effective tool. The harsh reality being they
are unlikely to reign in 40-year high inflation rates with their historically low (but reported “aggressive”) rate hikes.
The current Federal Funds rate stands at 3.25% against 0.25% a year ago. The last time we saw inflation rates above
8% was in 1981. The Federal Funds rate was above 13%. Those moves by then-Fed Chair Paul Volcker put the U.S.
into recession twice and broke inflation. We are not going back to those inflation-breaking rates. Expect commodity
price breaks, but most will not return to the pre-COVID price levels.
While the Fed rate hikes are working, they are driving the value of the U.S. dollar sharply higher in overseas markets.
Those nations unable to match U.S. rate hikes, like Japan, have seen a sharp fall in their currencies. This is shifting the
global pork market in Japan and exacerbating inflation for U.S. commodities in the world’s poorest nations. What it
has not done yet, is drive higher U.S. imports. That will be coming. At least for those goods globally available (sorry
beef importers).
All eyes now turn to recession risk. A recent Wall Street Journal survey showed economists putting the odds of U.S.
recession at 63% recently, up from 49% in July. Their forecasts suggests U.S. GDP contraction in both Q1 and Q2 of
2023 (-0.2% and 0.1%, respectively). Such a decline would be a mini-recession by historical standards.
All economic questions relating to recession timing, depth, length, and severity are now firmly in the hands of the U.S.
Federal Reserve Board. – Brett Stuart

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