No Pain, No Gain??

Another quick edition today, as the message is a cautionary one.

The rate of inflation has continued to increase recently. The Wall Street Journal quotes the nationwide inflation rate now at 7.9%. Most clients and friends with whom I speak say they feel little pain and that all they notice about inflation so far is the rising cost of gas and higher grocery store bills. How much longer will inflation continue “not to matter”? What if the US Federal Reserve gets impatient and starts raising rates more aggressively?

The jury is still out regarding how the US Fed will fight inflation today.

Typically, the ultimate goal, or “gain” produced by the Fed raising interest rates is to cool an overheating economy and tame inflation or potential inflation. The “pain” is the effect of higher interest rates:

  • Mortgages and home equity loans begin to carry higher rates
  • Credit card debt costs more
  • Perhaps most painful of all to the wealthy, is potentially declining stock prices – for a time.

In the Paul Volcker days of running the US Fed, in the early-to-mid 1980’s following the harrowing inflation of the 1970’s, the Fed raised short-term interest rates into the mid-teens! That pain eventually led to a healthier US economy followed by decades of historic stock market rallies. Over those decades there have been the usual bumps in the road, a few recessions, a dot-com stock market meltdown and even a financial crisis (2008-2009). But overall, the pain from those 1980’s Fed interest rate increases preceded the biggest market expansion the world has ever seen.

The “jury is still out” regarding how the US Fed will fight inflation today. One of the biggest (and partly mysterious) factors for the Fed to consider is the immense shortage of labor! There are currently 5 million more job openings than there are unemployed workers. Where have all the workers gone?

Stay tuned for how inflation does or does not become more painful… and what kind of gain – and when – is in store for Americans and the world.

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