(Mises)—The Federal Reserve’s Federal Open Market Committee (FOMC) on Wednesday left the target policy interest rate (the federal funds rate) unchanged at 5.5 percent. This “pause” in the target rate suggests the FOMC believes it has raised the target rate high enough to rein in price inflation which has run well above the Fed’s arbitrary two-percent inflation target since mid-2021.
The press release from the FOMC was largely unchanged from previous recent meetings and contained the usual language about the state of the economy and the Fed’s ability to manage it:
Recent indicators suggest that economic activity has been expanding at a solid pace. Job gains have slowed in recent months but remain strong, and the unemployment rate has remained low. Inflation remains elevated. … The U.S. banking system is sound and resilient. … the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in its previously announced plans.
This rosy and orderly picture of the situation relies on cherry-picking which indicators on which to base an assessment of the overall economy, and in his post-meeting press conference, Fed Chair Jerome Powell repeated the usual stock language the committee routinely provides on how present high labor demand proves there is no economic turbulence on the horizon. This reliance on current jobs data deliberately hides a larger and more accurate assessment of the economy. Nonetheless, in his comments at the press conference, Powell stated some undeniable facts:
Inflation remains well above our longer-run goal of 2 percent—4 percent over the 12 months ending in August—and that, excluding the volatile food and energy categories, core PCE prices rose 3.9 percent. Inflation has moderated somewhat since the middle of last year … Nevertheless, the progress—the process of getting inflation sustainably down to 2 percent has a long way to go.
This meeting of the FOMC was described as “hawkish” by Wall Street observers and pundits, mainly because the FOMC’s Summary of Economic Projections (SEP) suggested that the target inflation rate will remain at 5.5 percent—or even slightly higher—throughout the rest of the year. As Powell noted:
If the economy evolves as projected the median participant projects that the appropriate level of the federal-funds rate will be 5.6 percent at the end of this year, 5.1 percent at the end of 2024, and 3.9 percent at the end of 2025. Compared with our June Summary of Economic Projections, the median projection is unrevised for the end of this year but is moved up by a half percentage point at the end of the next two years.
If we read between the lines, it is apparent that the Fed is hoping that price inflation will fall to politically acceptable levels without any additional tightening, and without a recession. But “hope” is all the Fed has. The FOMC voting members have no idea what comes next. But, the members apparently still fear politically damaging price inflation isn’t going away as evidenced by most members’ admission that the target rate is unlikely to fall much before the end of 2024. This is notable because the FOMC members tend to strenuously avoid any predictions that rates might tighten further.
A look at the past three years of SEPs shows very little upward movement in target rates. Moreover, in 2021, Fed personnel were insisting with the utmost confidence that the target rate would not increase at all until late 2023. In reality, the Fed was forced to raise rates in 2022 as price inflation soared to 40-year highs. The Fed’s misplaced confidence in 2021 that low rates would endure all relied on a false narrative that price inflation would be either nonexistent or—at most—would be transitory. Fed economists were either lying or were utterly wrong about the state of price inflation. So, if Fed personnel have failed so miserably at predicting price inflation in recent years is there reason to now believe that the Fed now has the situation in hand? No.
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The Fed Forced Rates to Ultra-Low Levels for a Very Long Time
Nonetheless, the current narrative about the “hawkish” Fed is that it has slayed the price-inflation beast and that the Fed has allowed interest rates to rise to the “correct” level. Some even claim that the target rate is too high.
Much has been said of how the target federal funds rate is now at the highest it’s been since 2001. Yet, it is important to consider the cumulative effects of ultra-low-interest rate policy that proceeded the recent rate-hiking schedule. The fact is that beginning in late 2007, the Federal Reserve began a policy of forcing down interest rates for a very prolonged period that lasted until 2018. During this period, the target policy interest rate was consistently well below the CPI inflation rate. This produced a negative-value “gap” between the target interest rate and the CPI inflation rate. Then, from 2020 to 2023, this gap was driven deep into negative territory to levels not seen since the mid-1970s.
Indeed, the only period rivaling this post-2008 easy-money policy is the period of the mid-1970s which ended in the historical periods of high inflation experienced during the late 1970s and early 1980s.
The current target rate must be interpreted in light of the long duration of the easy-money years that came before today’s rate-raising trend given. During this period, easy-money fueled bubbles and malinvestments grew for fifteen years. Such immense amounts of monetary inflation cannot be “fixed” with a few months of 5-to-6 percent interest rates.
The long period of ultra-low rates we’ve seen over the past 15 years is a clear historical aberration and the product of a central bank seeking to force down interest rates again and again. Evidence of this can be seen in the Fed’s turn toward purchasing trillions of dollars worth of government debt and mortgage-backed securities (MBS) since 2008. The effect has been to drive down interest on Treasurys and create artificial demand for MBS to prop up commercial banks. An enormous bubble in asset prices—i.e., asset-price inflation—has been one result.
After so long a period, a “cure” for such enormous imbalances in the economy will not be engineered with a “soft landing.”
The claim that interest rates are “high,” of course, are unsupportable so long as the central bank replaces market interest rates with artificial central-bank-manipulated interest rates. The Fed has no idea what the “natural interest rate” is or what market interest rates would be in the absence of the central bank’s incessant interventions. So, it is impossible to say what the “correct” target rate is. Of course, it is safe to assume market rates would be higher than the current policy rate. If market rates would be actually lower than the current target policy rate, then there would be no “need”—”need” as perceived by central bankers—for the FOMC to manipulate rates downward as it is clearly trying to do.
At the First Sign of Trouble, Rates Will Head Down Again
The FOMC’s SEP shows that the target interest rate will remain above 5 percent, even to the end of 2024. There is no telling if the polled FOMC members actually believe this, but it is extremely unlikely that the target rate will remain anywhere near five percent if the employment situation worsens to the point it becomes a political liability for the current regime.
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Over the past 30-plus years, the central bank has consistently forced interest rates downward every time high unemployment and recession become evident to the public. Thus, it is likely the FOMC has already maxed out its target rate for this cycle. Yes, the FOMC has only “paused” the rate hikes, meaning it could conceivably move them higher in the near future. For cynical veteran Fed watchers, however, the pause immediately raises the question of whether or not the pause will be followed in, say, six months by a drop in the target interest rate. After all, historical experience shows that when the Fed “pauses” it rarely goes back to any sort of sustained period of monetary tightening.
Over the past thirty years, there have only been a few occasions during which the Fed paused for more than a single month, and then went back to allowing the target rate to move upward again. This occurred briefly in 2017, and in 1996 and 1997. In the quantitative tightening period between the Dot-com Bust and the Great Recession, however, the Fed never “paused” longer than a single month. If the Fed fails to allow rates to climb again next month, we’ll have good reason to suspect that the Fed is done with this current round of rate hikes.
The last decade has shown us that the Fed clings to a bias very much in favor of ramming down interest rates again and again. This is what happened in the ten years of near-zero rates that followed the 2008 financial crisis. Every month, the FOMC would come out and say that the economy was “growing” and was showing “strength” yet repeatedly refused to raise rates. In our current predicament, the Fed is afraid of price inflation, but is also afraid to raise rates even further, even as the August CPI data showed rates ticked upward again. Political expedience demands that the Fed do what it can to rein in price inflation without triggering sizable increases in unemployment. The Fed is holding the current rate steady because politics demands it.
Read More: “Yes, the Fed Really Is Holding Down Interest Rates” by Joseph Salerno.
About the Author
Ryan McMaken (@ryanmcmaken) is executive editor at the Mises Institute. Send him your article submissions for the Mises Wire and Power and Market, but read article guidelines first. Ryan has a bachelor’s degree in economics and a master’s degree in public policy and international relations from the University of Colorado. He was a housing economist for the State of Colorado. He is the author of Breaking Away: The Case of Secession, Radical Decentralization, and Smaller Polities and Commie Cowboys: The Bourgeoisie and the Nation-State in the Western Genre.
Five Things New “Preppers” Forget When Getting Ready for Bad Times Ahead
The preparedness community is growing faster than it has in decades. Even during peak times such as Y2K, the economic downturn of 2008, and Covid, the vast majority of Americans made sure they had plenty of toilet paper but didn’t really stockpile anything else.
Things have changed. There’s a growing anxiety in this presidential election year that has prompted more Americans to get prepared for crazy events in the future. Some of it is being driven by fearmongers, but there are valid concerns with the economy, food supply, pharmaceuticals, the energy grid, and mass rioting that have pushed average Americans into “prepper” mode.
There are degrees of preparedness. One does not have to be a full-blown “doomsday prepper” living off-grid in a secure Montana bunker in order to be ahead of the curve. In many ways, preparedness isn’t about being able to perfectly handle every conceivable situation. It’s about being less dependent on government for as long as possible. Those who have proper “preps” will not be waiting for FEMA to distribute emergency supplies to the desperate masses.
Below are five things people new to preparedness (and sometimes even those with experience) often forget as they get ready. All five are common sense notions that do not rely on doomsday in order to be useful. It may be nice to own a tank during the apocalypse but there’s not much you can do with it until things get really crazy. The recommendations below can have places in the lives of average Americans whether doomsday comes or not.
Note: The information provided by this publication or any related communications is for informational purposes only and should not be considered as financial advice. We do not provide personalized investment, financial, or legal advice.
Secured Wealth
Whether in the bank or held in a retirement account, most Americans feel that their life’s savings is relatively secure. At least they did until the last couple of years when de-banking, geopolitical turmoil, and the threat of Central Bank Digital Currencies reared their ugly heads.
It behooves Americans to diversify their holdings. If there’s a triggering event or series of events that cripple the financial systems or devalue the U.S. Dollar, wealth can evaporate quickly. To hedge against potential turmoil, many Americans are looking in two directions: Crypto and physical precious metals.
There are huge advantages to cryptocurrencies, but there are also inherent risks because “virtual” money can become challenging to spend. Add in the push by central banks and governments to regulate or even replace cryptocurrencies with their own versions they control and the risks amplify. There’s nothing wrong with cryptocurrencies today but things can change rapidly.
As for physical precious metals, many Americans pay cash to keep plenty on hand in their safe. Rolling over or transferring retirement accounts into self-directed IRAs is also a popular option, but there are caveats. It can often take weeks or even months to get the gold and silver shipped if the owner chooses to close their account. This is why Genesis Gold Group stands out. Their relationship with the depositories allows for rapid closure and shipping, often in less than 10 days from the time the account holder makes their move. This can come in handy if things appear to be heading south.
Lots of Potable Water
One of the biggest shocks that hit new preppers is understanding how much potable water they need in order to survive. Experts claim one gallon of water per person per day is necessary. Even the most conservative estimates put it at over half-a-gallon. That means that for a family of four, they’ll need around 120 gallons of water to survive for a month if the taps turn off and the stores empty out.
Being near a fresh water source, whether it’s a river, lake, or well, is a best practice among experienced preppers. It’s necessary to have a water filter as well, even if the taps are still working. Many refuse to drink tap water even when there is no emergency. Berkey was our previous favorite but they’re under attack from regulators so the Alexapure systems are solid replacements.
For those in the city or away from fresh water sources, storage is the best option. This can be challenging because proper water storage containers take up a lot of room and are difficult to move if the need arises. For “bug in” situations, having a larger container that stores hundreds or even thousands of gallons is better than stacking 1-5 gallon containers. Unfortunately, they won’t be easily transportable and they can cost a lot to install.
Water is critical. If chaos erupts and water infrastructure is compromised, having a large backup supply can be lifesaving.
Pharmaceuticals and Medical Supplies
There are multiple threats specific to the medical supply chain. With Chinese and Indian imports accounting for over 90% of pharmaceutical ingredients in the United States, deteriorating relations could make it impossible to get the medicines and antibiotics many of us need.
Stocking up many prescription medications can be hard. Doctors generally do not like to prescribe large batches of drugs even if they are shelf-stable for extended periods of time. It is a best practice to ask your doctor if they can prescribe a larger amount. Today, some are sympathetic to concerns about pharmacies running out or becoming inaccessible. Tell them your concerns. It’s worth a shot. The worst they can do is say no.
If your doctor is unwilling to help you stock up on medicines, then Jase Medical is a good alternative. Through telehealth, they can prescribe daily meds or antibiotics that are shipped to your door. As proponents of medical freedom, they empathize with those who want to have enough medical supplies on hand in case things go wrong.
Energy Sources
The vast majority of Americans are locked into the grid. This has proven to be a massive liability when the grid goes down. Unfortunately, there are no inexpensive remedies.
Those living off-grid had to either spend a lot of money or effort (or both) to get their alternative energy sources like solar set up. For those who do not want to go so far, it’s still a best practice to have backup power sources. Diesel generators and portable solar panels are the two most popular, and while they’re not inexpensive they are not out of reach of most Americans who are concerned about being without power for extended periods of time.
Natural gas is another necessity for many, but that’s far more challenging to replace. Having alternatives for heating and cooking that can be powered if gas and electric grids go down is important. Have a backup for items that require power such as manual can openers. If you’re stuck eating canned foods for a while and all you have is an electric opener, you’ll have problems.
Don’t Forget the Protein
When most think about “prepping,” they think about their food supply. More Americans are turning to gardening and homesteading as ways to produce their own food. Others are working with local farmers and ranchers to purchase directly from the sources. This is a good idea whether doomsday comes or not, but it’s particularly important if the food supply chain is broken.
Most grocery stores have about one to two weeks worth of food, as do most American households. Grocers rely heavily on truckers to receive their ongoing shipments. In a crisis, the current process can fail. It behooves Americans for multiple reasons to localize their food purchases as much as possible.
Long-term storage is another popular option. Canned foods, MREs, and freeze dried meals are selling out quickly even as prices rise. But one component that is conspicuously absent in shelf-stable food is high-quality protein. Most survival food companies offer low quality “protein buckets” or cans of meat, but they are often barely edible.
Prepper All-Naturals offers premium cuts of steak that have been cooked sous vide and freeze dried to give them a 25-year shelf life. They offer Ribeye, NY Strip, and Tenderloin among others.
Having buckets of beans and rice is a good start, but keeping a solid supply of high-quality protein isn’t just healthier. It can help a family maintain normalcy through crises.
Prepare Without Fear
With all the challenges we face as Americans today, it can be emotionally draining. Citizens are scared and there’s nothing irrational about their concerns. Being prepared and making lifestyle changes to secure necessities can go a long way toward overcoming the fears that plague us. We should hope and pray for the best but prepare for the worst. And if the worst does come, then knowing we did what we could to be ready for it will help us face those challenges with confidence.
