Fed Liftoff Day is Here

The Federal Reserve has raised interest rates by 25 basis points today, moving the Fed funds target rate off of zero to a target of 0.25/0.50. The target rate had been at zero since COVID-19 arrived on US shores more than two years ago, and was brought there along with extraordinary Fed intervention in an attempt to stimulate financial markets and keep the US from entering a recession or depression.

We’ve had two previous liftoff days in the last twenty years. On June 30, 2004, the Consumer Price Index (CPI) was 3.1%. And, on December 16, 2015, the CPI stood at 0.5%. The fact that the CPI has reached 7.90% before the Fed has acted indicated that Chairman Jay Powell’s monetary policy has been way behind the curve.

Not only are the Fed’s actions too late, but a quarter-point move in the Fed funds rate – or a handful of such moves as is now projected – is too timid. Even if the Fed raises each month from now until June, the Fed funds rate will only be at a target rate of 1.00/1.25 over the summer. This is not an inflation-fighting rate move.

Rather, the Fed has indicated today that in 2 years it will bring the Fed funds rate to 2.80%, but that is two years until we are finally going to be fighting inflation.

In the meantime, the Fed has created a financial market that is dramatically overvalued with valuations in many sectors that are so irrational that equity investors are all but guaranteed to lose money. As rates rise, bond prices too are certain to fall. And, because the Fed’s move is so timid and inappropriate to address current inflationary circumstances, cash investors will continue to watch the deterioration of their real wealth as rates remain below anything even remotely necessary to ensure purchasing power parity.

Jerome Powell has allowed himself and the Fed to be frozen by his uncertainty. If this world has a future after Putin, he will certainly go down in history the worst possible Federal Reserve Chairman at the worst possible moment in time.