Federal Reserve’s Policy Mistake is Going to Have Grave Consequences

The Fed is lowering interest rates in the face of sticky and rising inflation. That is a disaster in the making.

WolfStreet.com –

“Inflation is in services, where it accelerated further, even in the inflation index that the Fed prefers, the PCE Price Index released today by the Bureau of Economic Analysis, though Powell has been denying it in recent speeches, blaming instead imported goods and tariffs for the current inflation impetus. But the PCE price index for durable goods, many of which are tariffed, fell (negative readings) in August for the second month in a row, while inflation in services, which are not tariffed, accelerated further.

Both the overall PCE price index and the core PCE price index accelerated further year-over-year, and their increases (+2.7% and +2.9%) are now worse than a year ago.”

AI Overview of “lowering rates in the face of rising inflation is a disaster, aheadoftheherd.com”

Ahead of the Herd argues that lowering interest rates during rising inflation risks a “disaster” by fueling further inflation and potentially causing a stagflationary debt crisis. By cutting rates too soon or abandoning anti-inflation efforts, central banks, such as the Fed, could repeat past policy mistakes, leading to a mountain of inflation and a depreciating currency.  

The Core Argument

Policy Mistake: The central idea from Ahead of the Herd is that lowering interest rates while inflation is still high is a major policy error, reminiscent of past economic missteps like those in the 1970s. 

Fueling Inflation: Lowering rates makes saving less attractive and encourages spending, which increases demand in the economy and drives inflation even higher. 

Currency Risk: Such a policy can increase currency risk, as seen with the rising US dollar yields, as the currency loses value and appears less appealing to investors. 

Consequences of Lowering Rates

Stagflation: The risk is a period of stagflation, characterized by high inflation and economic stagnation, which creates a debt crisis for consumers and banks. 

Dollar Weakness: The U.S. dollar could be crushed by this policy, leading to higher commodity prices. 

Investor Speculation: Lower rates could fuel a “retail speculative gambling bubble” in the stock market, creating market instability, according to the site. 

Why Central Banks Might Act

Political Motivation: There may be pressure, such as from politicians wanting to lower the cost of national debt, to reduce interest rates. 

Economic Misjudgement: The site suggests that central banks might abandon efforts to control inflation in favor of promoting reflation.

The Author’s Stance

Advocacy for Higher Rates: The author, Richard Mills, argues that interest rates should be higher to combat inflation, not lower. 

Precious Metals as a Hedge: Mills’ analysis often leads to a positive outlook for precious metals like gold and silver during such inflationary periods, seeing them as a hedge against a weakening dollar. 

Richard (Rick) Mills
aheadoftheherd.com

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