The Federal Reserve announced an increase in interest rates Wednesday afternoon, boosting the cost of borrowing money by 0.75%, the largest increase in a single meeting in nearly 30 years. The announcement is part of efforts to head off a recession.
The Fed gaveled in their two-day meeting this week as Consumer Price Index hits a 40-year high and wages are at the 40-year low. While the Federal Reserve is, in theory, politically independent the chairman is appointed by the president, and in practice remains politically aware. A recession would further plague President Joe Biden and congressional Democrats, who have been unchecked in Washington, enacting policies that Republicans and economists say have raised prices on American households to historic levels.
Wholesale inflation is hovering at more than 10% and retail inflation hit 8.6% in May, the highest rate since 1981. Food prices up 10% over last year, housing up 20%, all while the U.S. Department of Labor reports that wages are down 3%.
The overall energy index rose nearly 35% this year, with gasoline prices are up 48%. Skyrocketing energy costs is a primary driver behind inflation, spiking costs in nearly every corner of the economy.
Meantime, the Biden administration is pushing the phrase “Putin price hikes,” in social media and press appearances, tacking soaring inflation to the Russia invasion of Ukraine.
Economists say that while the Russia invasion exacerbated a fragile fiscal situation at home, policy decisions by the White House and Congress over the last eighteen months made an economic disruption turn into a full-blown crisis with recession looming on the horizon. The Biden administration is also pushing the idea that inflation rates are this high, or worse, globally.
“Under my plan for the economy, we’ve made extraordinary progress,” Biden in a said in a speech at the AFL-CIO labor union convention this week. “And we put America in a position to tackle the worldwide problem that’s worse everywhere but here: inflation.”
Is inflation worse elsewhere in the world? No.
Globally, some nations are experiencing inflation, but nothing close to what is happening in the United States. European countries have consistently had inflation rates 4% or more below that of the U.S.
The Federal Bank of San Francisco recently put out a study of U.S. rates as compared to an average of eight wealthy European nations; United Kingdom, France, Germany, Canada, the Netherlands, Norway, Sweden, and Finland. Below, the blue represents U.S. inflation over the last 3 years, the red line is the average of the other countries.
Canada has the second highest inflation at a full percentage point below the U.S.
Policies Driving Prices
A mass infusion of cash into the economy during COVID lockdowns were a key part of driving inflation up. In March of 2021, weeks after president Joe Biden took office, Democrats in Congress passed a 1.9 trillion stimulus bill called The American Rescue Plan, that offered sweeping benefits to everyone, regardless of their economic crisis level; $1,400 checks for each person in a family, expansions to unemployment insurance and child tax credit benefits.
That came just months after the first trillion-dollar COVID package was passed under the Trump Administration. According to economists it was good intentions, but disastrous consequences.
“We put gasoline on a fire,” said Marc Goldwein of the Committee for a Responsible Federal Budget. “That’s basically what the ARP did. It was almost written as if we didn’t just pass a trillion-dollar stimulus in December.”
The U.S. spent 27% of the nation’s Gross Domestic Product on COVID stimulus plans, second only to Singapore which spent 29%. Only eight nations spent more than 20% of their GDP on COVID stimulus. Nations that spent less are recovering now, with their economy relatively intact, even though many are experiencing some level of inflation. The U.S. is on the brink of a recession.
“The Fed needs to raise interest rates, a monetary response to the monetary phenomenon of inflation. But that could tip us into a recession. Moving forward, we have to stop the spending and reject Biden’s Build Back Better plan and the disincentives to work that accompany it,” Paige Terryberry, Senior Analyst for Fiscal Policy, John Locke Foundation.
While not a policy, the labor shortage stemming from COVID shutdown policies and stimulus spending has a monumental impact on the current economy.
“People don’t want to talk about it these days, but it’s true: Since I’ve become President, we’ve created 8.7 million new jobs in 16 months. An all-time record,” Biden told the AFL-CIO gathering Tuesday.
However, the nation is still 800,000 jobs below pre-pandemic levels, and the participation rate is still just 62.3%, also below pre-pandemic levels. These indicate that most of the new employment growth is still recovering those jobs that were lost in pandemic shutdowns of 2020 and 2021.
“I think we can say with certainty that we would have less inflation and fewer problems that we need to solve right now if the American Rescue Plan had been optimally sized,” said Wendy Edelberg, a senior fellow in economic studies at the left-leaning Brookings Institution.
A glut of cash from government stimulus also flooded the market in 2021, triggering the U.S. economy to grow faster than other countries, but economists say we are paying the price now. Employment data released on June 1 show that the number of open jobs decreased to 11.4 million in April, a drop of about 7%.
“Job openings continue to reach record highs, said Terryberry. “Nationally, there are nearly two jobs open for every employment seeker.”
The data also shows a significant employment gap, the time during which people remained unemployed.
“Businesses are desperate for workers, pushing up labor costs and therefore business costs.” Terryberry added. “Although unemployment bonuses have ended, the extended and expanded benefits of SNAP and Obamacare, for example, add to inflationary pressures.”
Federal Reserve Inaction
The Federal Reserve waited to act on growing inflation rate.
Now, months into skyrocketing inflation, the Fed is forced to take more drastic action, risking a recession. The interest rate increase this week may still be too little, too late, and it probably won’t be the last increase in the near term.
“Clearly, today’s 75-basis-point increase is an unusually large one, and I do not expect moves of this size to be common,” Federal Reserve Chairman Jerome Powell said Wednesday at the announcement. “From the perspective of today, either a 50-basis-point or a 75-basis-point increase seems most likely at our next meeting.”
Mortgage lenders say they are already seeing housing lending rate nearing 6%, the highest since 2008. It may cool the white-hot housing market, but will challenge younger Americans’ dreams of owning a home.
War on Affordable Energy
A recent grid reliability report says the west and midwestern part of the country should be braced for rolling power outages this summer. The report comes from The North American Electric Reliability Corporation and says that high summer temperatures, the difficulty getting coal to coal-fired energy plants, and mechanical failures in some hydroelectric facilities indicate a difficult summer ahead.
“We’ve been doing this for close to 30 years. This is probably one of the grimmest pictures we’ve painted in a while,” John Moura, from NAERC, told CBS MoneyWatch.
While energy prices climb more than 30% in a year, the Biden Administration is focusing energy policy on bolstering clean energy with executive action, offering tax credits and investing taxpayer money in clean energy products. Combined with the administration’s anti-oil and gas rhetoric, energy providers are cautious.
“From handing Afghanistan to the Taliban to destroying our American Energy Dominance, it is clear this administration cares more about appeasing radical left-wing activists than doing the right thing for the American people,” said Wayne Christian, head of Texas’ energy agency, in a March letter to the White House.
This week, Biden blamed oil companies, claiming they are “sitting on” reserves they have not released, or not drilling on land where they have approved permits in an effort to boost profits. In a letter Tuesday to seven companies Biden demanded that they take “immediate action” to ramp up production.
“The lack of refining capacity — and resulting unprecedented refinery profit margins — are blunting the impact of the historic actions my Administration has taken to address Vladimir Putin’s Price Hike and are driving up costs for consumers,” Biden wrote.
In March, Biden directed the Department of Energy released strategic oil reserves for a third time at the rate of one million gallons per day for 180 days, to try to ease pressure at the pump. However, it proved to be too little too late again. The amount released from the reserves amounted to about five percent of U.S. daily consumption, and prices continued to climb. Currently, gas prices are $5.10 on average per gallon nationwide, and $5 per gallon in N.C. According to lawmakers, the national stockpile is at its lowest level since 1987.
Economists say the Biden administration should instead adopt an “all of the above’ policy stance on energy when so much of the nation is struggling.
“The Biden Administration has restricted the supply of reliable and affordable energy in favor of his “climate” agenda and a political war on affordable energy,” said Terryberry.
According to a recent study from the Mercatus Center, consumer prices go up a full percentage point for every 15% increase in federal regulations.
Their report also estimates that in the first year since Biden took office, his administration has issued new regulations industries at a rate 25% higher than former President Donald Trump. Their estimated cost to industry, and ultimately consumers, is $200 billion in higher operating expenses, more than both the Obama and Trump administrations.
“Price increases caused by regulation have a disproportionately negative effect on low-income households,” study authors Dustin Chambers and Courtney Collins wrote. “The poorest households tend to spend a lahttps://www.congress.gov/bill/117th-congress/senate-bill/68rger proportion of their income on goods that are heavily regulated and subject to both high and volatile prices. This cost should be recognized in policymakers’ efforts to consider the costs and benefits of new and existing regulations.”
An option being promoted by the Foundation for Government Accountability called the REINS Act, would require congressional approval for major industry regulations.
“Lowering inflation requires limiting regulation,” Jonathan Ingram of FGA wrote in a recent editorial. “It’s at least as important as producing more energy, getting more people back in the workforce and controlling federal spending. Americans should see the rapidly growing list of heavy-handed mandates for what it really is: a direct assault on our ability to afford everyday life.”
Beyond what action the Federal Reserve took on Wednesday, recession can also be a self-fulfilling prophecy. If consumers see high prices and diminishing value in their pay, they will act accordingly, cutting expenses and investments.
The Fed’s announcement is doubly intended to inspire the stock markets and consumers to have faith that the economic slide is under control. The base interest rate hike of 75-point hike would be the largest since 1994, when The Contract with America swept Republicans into control of Congress with Democrat President Bill Clinton in the White House.