Today the Federal Reserve made it official by tacking 75 basis points (three-quarters of a percentage point) onto interest rates with the desire of slowing the economy and, by proxy, inflation.
It was expected. What was unexpected was the comical analysis by the CNBC Fed watcher. He’s one of the reason cynics call the financial network CNBS.
This shill, who probably needs the makeup crew to wipe the shoe polish off his mouth – picked up by licking the boots of Fed chairman Jerome Powell and his predecessors – was called out by more than one of the panelists on the Fast Money show at 5 p.m.
All of these are people who actually run money in the real world and so get their work judged not subjectively, but objectively – by results. One offered that stock markets might prefer big interest rate increases and a sharp, swift recession, in order to get past the inevitable and be able to look ahead to recovery.
Many other investment professionals also see it that way and think the Fed’s laborious raising of rates hoping to produce the so-called “soft landing” for the economy only drags out the problems.
Think of the quick, deep recession as the investing equivalent of yanking off a bandage quickly instead of puttering around with many small tugs.
One technical definition of a recession is two consecutive quarters of decline in the nation’s GDP (Gross Domestic Product). We already have had a decline in the past quarter and reports show the current quarter on a knife’s edge between small growth or small decline.
Yet the CNBC hack said he’s one of the tiny number of observers still thinking the Fed can manage that soft landing; beating down inflation without the economy suffering a recession.
This shows, if nothing else, he has the weakest grasp of probabilities.
But his incredulous response to the matter of preferring a quick bout of recession vs. a grinding example, was stunning even as the panelists lined up to argue with him.
The facial expressions and bobbing of his bald head made it clear the Fed expert could not, or would not, accept real-world input.
This is a microcosm of our country. People like Powell, and this sycophant, make their livings talking the theoretical and never being held to account for the accuracy of their pronouncements, sort of like your local purveyor of TV weather forecasts.
A basic method of inflation fighting is to affect the real interest rate. If one can borrow money at 3 percent, and the inflation rate is 9 percent, that’s a negative-six percent real interest rate.
Translation: You are charged 3 percent interest on the borrowed money, but pay it back with money that is 9 percent less valuable, netting the borrower a risk-free 6 percent return.
Obviously, this encourages borrowing.
But when interest rates are higher than inflation, borrowing dries up due to the built-in loss.
Paul Volcker, the Fed chairman the last time the U.S. saw inflation at or above the current 8.6 percent, had to overshoot with interest rates just to get the attention of the markets and the populace.
While inflation then peaked at about 15 percent, the prime interest rate exceeded 21 percent. Contrast that to the current situation of an 8.6 inflation rate (which would be higher using 1980 measurements, by the way) and the prime rate newly raised to 4.75 percent.
If Powell truly thinks he can crimp inflation, he’s going to have to pull off multiple 75-basis point raises, or even higher examples.
To think that the Fed has the political stomach for this in view of the economic turmoil it would cause is a stretch. Even more of a stretch is thinking the Fed can continue to raise interest rates and the economy somehow will avoid a recession.
Yet that is the take of the Fed expert on CNBS.
Sam Ross Jr's site 