Fed Raises Rates To Fight Inflation – Will It Work?

The Fed Open Market Committee (FOMC) which regulates monetary policy and sets short-term interest rates met on Tuesday and Wednesday of this week amid much anticipation, but there were no surprises in its policy statement released yesterday afternoon. The Fed has been signaling higher interest rates for months.

The FOMC raised its Fed Funds target interest rate from 0.25%-0.50% to 0.75%-1.0% as was widely expected and indicated there would be more 0.50% increases at subsequent policy meetings later this year. Again, no surprise. The Fed will hold five more policy meetings this year and may raise rates at each of those meetings.

The Fed is scrambling to head off rising inflation which has soared to a 40-year high in the Consumer Price Index. It remains to be seen if raising its short-term interest rate will be effective in slowing the inflation rate.

The FOMC also indicated it will be taking steps to reduce its enormous balance sheet of over $8 trillion in assets, made up of Treasury bonds and bills and mortgage-backed securities – mainly by not buying more of these instruments and letting maturing securities roll off the books. Again, no surprise – the Fed has been signaling these changes for weeks.

The Consumer Price Index continued to rise in March (latest data available) to an annual rate of 8.5%, up from 7.9% in February, and the highest level since December of 1981. Even worse, the Producer Price Index (PPI), which reflects wholesale prices, soared to an annual rate of 11.2% in March, the highest monthly jump on record. The reports for April will be out next week.

A whopping 94% of Americans describe themselves as either concerned or upset about inflation, according to a new Washington Post-ABC News poll released last weekend. Skyrocketing inflation across the economy has hammered Americans’ wallets and become a defining issue of the midterm elections.

The price of regular unleaded gasoline soared to $4.33 per gallon in March and is still above $4.20 as this is written. Diesel prices soared to a new record high of $5.37 a gallon this week. This doesn’t just hurt truckers; it hurts all of us in the form of higher prices we pay for goods and services. I don’t expect meaningful relief anytime soon.

Record Labor Shortage Continues, Question Is Why?

The number of unfilled jobs in the US remained at a record high of 11.5 million at the end of March (latest data available). The Labor Department reported that 6.7 million people were hired in March, while 6.3 million left their jobs for various reasons. Unfilled job openings exceeded the number of available workers by 5.6 million.

Americans said their biggest reasons for quitting in the last year were low pay, a lack of career advancement and because they felt disrespected at work, according to a recent report from Pew Research Center.

As of March, America still had three million fewer jobs than it had in early 2020. The Labor Force Participation Rate was only 62.4% at the end of March.

While there are several root causes of the labor shortage – the Covid-19 pandemic, America’s aging population, accelerated retirement rates, demands for better wages and labor conditions, the absence of childcare options, and more – there is another significant and under-discussed factor: immigration.

Amid all these developments, net international migration to the US between 2020 and 2021 added only 247,000 to the nation’s population, the lowest level in decades. The National Immigration Forum, an immigrant lobbying group, is urging the government to remove all the administrative restrictions and procedural hurdles that have prevented immigrant workers from filling key labor needs.

They’ve already effectively done it along our southern border where millions of illegal immigrants are flooding in. Our border cities and towns are in chaos, and the Biden administration knows it. But they want those expected votes from these illegals, despite the cost and danger for our citizens who live in these border areas.

On a related note, recent reports show the Latino population increasingly moving away from the Democratic Party, becoming Republicans or Independents. So, while the Dems seem content with our southern border being open, those votes are certainly not assured if this trend continues.

As a result, the upcoming elections later this year and certainly in 2024 may be the most interesting in years! I’ll have much more to say about this in the weeks and months ahead.