The Fed is Not Your Friend

Dogma; a specific tenet or doctrine authoritatively laid down; prescribed doctrine proclaimed as unquestionably true by a particular group.

Fed Dogma to raise rates to temper growth for fear inflationary forces takeover needs to be picked apart.

Competition between product/service providers drives prices higher when labor and raw materials being competed for cannot increase supply fast enough to satisfy demand. Competition between consumers drives prices higher when supply of products and services cannot increase fast enough to satisfy demand.

Capacity Utilization for July reported 78.1%.

Labor Participation Rate for July was 62.9% meaning 37.1 % of the population age group from 16 to 64 is not employed or seeking employment.

PPI for July reported 0.0% and 2.8% year over year. CPI reported +0.2% and + 2.4% year over year.

Important to note that Fed Policy has significantly decreased buying power. For example in 2008 when Oil was trading $150 per barrel the price at the pump for midgrade was $4.50 (0.03%).  Today Oil is trading at $68 per barrel and midgrade price is $3.34 (0.5) (Will County, IL). In other words we are paying $3.34 for midgrade instead of $2.04 ($68 *.03) due to loss of buying power of U.S. $ (think Quantitative Easing devaluing the dollar).

In July, when Fed Chairman Powell testified in front of the Senate Banking, and then the House  Financial Services Committees the following questions should have been asked:

  • How significant are wages depressed due to non-enforcement of immigration laws?
  • How significant are wages depressed due to H-B1 Visa’s?
  • What would the Labor Participation Rate be if U.S. Citizens were working for higher wages not artificially depressed by non-enforcement and H-B1 visas?
  • Why would an economy strengthened by higher wages and fuller employment; and the production and labor capacity to meet increasing demand be inflationary?
  • How is the Fed reconciling increased lending competition between banks and private equity and the significant increase in capital available for self-funding created by the Tax Cut and Jobs Act?
  • Isn’t doing more with less in a shorter period of time (competition) the key to keeping prices down?
  • If the structure is in place (unused capacity and available labor given higher wages) to accommodate increased demand then why would the Fed want to stifle competition by increasing the cost of capital to new competitors?
  • How are benefits (cost reduction) from rapidly advancing technology (for example just in-time inventory and robotics) factored into Fed Forecasting?
  • How is the Fed factoring in the deflationary forces of increasing global competition?
  • How is the Fed factoring in the impact of regulatory clawback reducing production costs and increasing supply?

Considering all of the above I am confused (and I think you should be too) as to why the Fed needs to hike. Especially when each .25 rate hike increases the cost of debt in the Federal Budget by $55 B annually. Imagine what that money could do for improving care for our Vets, re-gentrifying inner cities, advancing education, and increasing health care availability, or shrinking the deficit.  The Fed is poised to take another $110 B from the taxpayer (2 more .25 rate hikes) by end of year.

Instead of forcing banks to compete the Fed is protecting them. That topic will be covered in my next article.