To the Fed I Say, "Not So Fast"

I am no economist, but I say, "Not so fast," on the idea of the Fed lowering interest rates just yet, even if there are some indications of some minor improvements in both the rate of inflation as well as certain jobs data.

Investors appear hopeful we may see the Fed rate lowered.

While we're closer to the desired 2% inflation rate, we're still much higher than that. Beyond that, what we experienced in this particular inflationary period while interest rates were higher was no real slowdown in consumer spending—something that is aimed for when the Fed raises rates. The idea is, of course, to at least stall the economy.

Part of the reason spending really didn't slow down all that much, I think, was due to a couple of factors, and perhaps a third one.

For one thing, while many jobs were impacted by the pandemic shutdowns, many people—in fact, the majority of workers—remained fully employed and earned paychecks. With less places to spend their earnings, people accumulated money that would have otherwise been spent. That money rested on the sidelines until things finally opened back up.

The second thing was that trillions of dollars were forced into the economy through relief checks to people and businesses. On top of that, unemployment benefits were extended for people impacted by Covid. In other words, while the economy itself had a stall during the pandemic, consumers were still largely cash rich. They were either stockpiling money or they were otherwise shored up by the government.

That left a lot of money on the table to be spent eventually and spend it consumers did when doors were once again open.

The third thing, I think, was a bit of what I am calling a "capitulation," of sorts. During that roughly two-year period it was miserable. No two ways about it. If you were spending, it was only on the essentials. With the lockdowns you couldn't really go anywhere. And even when it came to any shopping you could do there were massive supply chain disruptions which meant shelves were virtually left empty on many of the things we needed and wanted to buy.

Then came massive inflation, and I think people simply said, "Screw it." 

People not only wanted to get out when the economy opened back up for business. They needed to. And they were going to spend their money no matter what because they had the money to spend. Thus, through all of this, even while the Fed tried to slow people down, it just wasn't happening, and inflation continued despite the efforts of the Fed.

I do think we are finally seeing at least some indication that higher interest rates are beginning to take effect and help to reverse course. McDonald's and other fast-food chains recently reported a slowdown in sales for the first time in a long time. Consumer spending overall has slowed a bit.

The thing is, why lower rates now when things are just getting started? Let's get much closer to that 2% and then make a decision.

It's sort of the same reasoning that Biden's passage of the American Rescue Plan at a time when things were already opened back up and people began returning to work was simply wrong. It provided for prolonged issues in the supply chain and lead to massive labor shortages, both of which contributed largely to a lot of the inflation we are experiencing now.

It was simply the wrong time to infuse more money into the economy when it really didn't need it.

It's not to say that even if the Fed lowers the rate nominally, say 25 basis points, that consumers will go wild and return to normal spending levels right away. But I think the better idea is to wait until not only we get to the desired 2%, but we stay there for a little while. Then we lower the rates.

Today we will hear comments from New York Fed President John Williams and Richmond Fed President Tom Barkin that should at least provide for a better idea as to what moves the Fed will make in the near term.

I am hoping they indicate that for now we're going to sit tight.

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