The basic function of a Central Bank is to follow its legal mandates. In the USA, the Fed is responsible for"
Clearing Checks. Action 1.
Acting as Government's Fiscal Agent. Action 2.
Supervising member banks. Action 3.
Regulate Money Supply. Action 4.
Supply Paper Currency. Action 5.
Setting Reserve Requirements. Action 6.
Keeping employment up and prices stable is not delineated on the Fed's site list of duties but it is a known function.
If the administration of pf these 6 (or 8) duties were adhered to, I'd have no problem with it. However, the Fed and other central banks in the world have become political arms of control and major sources of harm to the middle class and poor. The might at times be a pain in the ass for the wealthy too but those with big money have options others do not. Price increases for a steak or gallon of milk or rent and electricity have little to no affect on the wealthy.
The term, easy or loose credit includes the crucial subject of interest rates. Tight credit is its opposite. In raising rates by 0.75% the Fed is attempting to tighten credit and thereby lower inflation by chilling business activity and consumer consumption.
What is the difference between the bank rate and the overnight rate?
The discount rate, or bank rate, is sometimes confused with the overnight rate. While the bank rate refers to the rate the central bank charges banks to borrow funds, the overnight rate—also referred to as the federal funds rate—refers to the rate banks charge each other when they borrow funds among themselves. When the Fed had zero interest rates that was basically free money. Most of it went to big banks on Wall Street and kept the stock market rising. I general, when rates are low and bonds pay little to nothing, the parking place for money is in stocks. We have witnessed a very long period of this "free" money and the chickens have come home to roost. All of the free cash floating around makes its way into the system and eventually manifests in higher prices. But do not make the mistake of thinking higher prices is Inflation. Printing free money out of thin air increasing the money supply to support deficit spending by the Government IS Inflation. Inflation is created by the Fed responding to the Government. It is not price gouging by big oil or anyone else. Market forces like competition keep prices in check and at times deflate prices and lower the cost o living. But governmental manipulation of the money supply is our culprit. Can this be corrected?
I the 1970's after the gold standard was dropped the currency was free to float. This is what is called a fiat currency. It is legal tend by declaration not intrinsic vale like Gold etc. The printing press ran hard then and inflation became a big problem. Paul Volcker did what was needed though painful by raising interest rates to 20% which quickly quelled inflation and began lowering prices. He was reviled by many but he did the right thing. Powell, the current Fed Chairman is NOT doing anything of substance to fight Inflation. You can't fight Inflation of 8.6% (it's actually more like 17-20%) with interest rates at 1.5% or even 3.25% as projected this year after further increases in rates. The fact is, Powell is still supporting loose money and is way behind the inflation curve. Inflation will NOT get quelled by his policies. It will increase.
Add to the situation that debt service on the National Debt is a very different world than in the 70s and 80s. AT tat time the USA was a creditor nation. Not any more. See https://am.jpmorgan.com/us/en/asset-management/adv/insights/market-insights/market-updates/on-the-minds-of-investors/When-will-us-debt-become-unsustainable/.
The idea that the USA could default on its debt is real. See https://www.manhattan-institute.org/riedl-higher-interests-push-washington-toward-federal-debt-crisis
The Fed knows it is moving the US economy into a recession which they expect will chill consumption and raise unemployment. That is their plan for addressing the high inflation we are experiencing. That plan in effect will blight the middle class and poor and lower the standard of living and raise taxes. Raising taxes is inevitable and should be accompanied by greatly decreased governmental spending. I have little reason the believe the latter will happen. In fact, under Biden, spending is wildly still going on. The Left loves a good emergency because it lets them justify more spending and grabbing more control over the economy and populace. A very bad combination.
I expect a recession and we are likely already in one. That recession could become a Depression. A recession is a downtrend in the economy that can affect production and employment, and produce lower household income and spending. The effects of a depression are much more severe, characterized by widespread unemployment and major pauses in economic activity. Recessions can also be more localized, while depressions can have global reach. Yes, I do believe we are heading for a Depression. The question is, how much harm will it do to our Republic. The many plates spinning on the world stage will exacerbate a Depression and I suspect we will have great civil unrest especially when food becomes scarce. Hungry people do harm, starving people do worse.
A plan to consider is holding Gold and/or Silver which will protect what wealth you have accumulated and protect purchasing power. The Fed will try to keep things afloat again when they observe the potential for the debt crisis and potential default. That simply will create more inflation and the death spiral tightens. This will not end well.
Best,
Donn Marier
DM-Your Own CFO