Is The Fed Using The Wrong Tools?
The Federal Reserve, our nation’s central banker, has been hiking interest rates aggressively in an attempt to lower inflation and stop red-hot housing and hiring markets. Are these old men and women working off a script that no longer works?
In a debt-laden economy that also has debt-laden workers, rising interest rates pull money out of the pockets of ordinary people, small businesses, and companies that rely on financing everything from buildings to inventory. However, can that really stop the march of increased prices on things that are in short supply or simply don’t exist?
The answer, as presented by our current economy, is no.
Real estate and homes are in short supply. In contrast, because of pandemic work shifts, office space is gluttonous. You can’t run a business if you don’t have workers, and there are clearly enough open jobs to extend the hiring spree. You can’t run a business if you don’t have employees, and many companies are simply trying to replace staff that they lost or retired. They are not trying to expand but simply keep their head above water.
If you are running a restaurant or a manufacturing facility that is short-staffed and a rush of qualified workers apply for the jobs, it is difficult to see why any interest rate would stop a manager from hiring. Many companies are simply running with too few people in place to sustain their businesses.
Product shortages are everywhere. I recently went to order microphones (a fairly narrow category) and was told one of the main players in this industry has no stock until 2023! People are buying cars with high mileage and high prices because they have no choice (welcome to Cuba!). Sometimes it takes over an hour to get a pizza delivered because there are simply too few delivery people.
It is simple supply and demand — if you do not have enough of a thing that people want, the price goes up. High-interest rates, be damned. If you need a car and there are no cars on the dealer lots you can only take the price they charge. Period. I tried haggling. They laughed.
What is the Fed waiting for?