Today, the PPI is due to be released at 8:30 EST. The CPI was released yesterday, and it shows that inflation is starting to slow down. It was up 5.0% which was the lowest level of growth since May 2021. Raising interest rates has slowed the economic engine with more slowness over the next couple of months. Interest rate hikes have a lagging effect, and we probably will be seeing more declines in the economy. Has anyone seen that the Fed Funds rate has jumped from .08% at the end of year in 2021 to over 4.83%. The stock market has been crushed but even bond holders are suffering.
The FED says the banking crisis will cause a recession? HUH? Did I miss something? This is what the FED said it wanted. I am confused because the banking crisis started because a few banks bought Treasuries. Treasuries are supposed to be a safe haven. Yeah, we can argue that the bank managers should have structured a better bond laddered portfolio but look at the Fed Funds rate over the last 5-10 years…1.74% and 1.04%. Wow! The losses on the bond portfolios are huge! Guess who is not loaning money to small businesses now. Small banks aren’t because their capital has losses, and they can’t loan. They are in trouble and trying to shore up reserves. Everyone including Warren Buffet says more bank failures are coming… Who knows. I am not sure what will happen, but I don’t think the banking crisis is causing the recession. It was the FED that helped get the banking system sick and of course it is now a major contributor to the slowdown. The Fed is getting exactly what it asked for to slow the economy.
The PPI is due out soon. We will see what the number is, but the FED has made it clear they will not stop until interest rates are over 5.25% and maybe 5.5%. I think a pause is merited because we know interest rates have a lagging consequence. Let the pie bake, stop checking it as it is cooking.
To understand why controlling inflation is important read Why is Inflation Bad?
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