Now it Should Get Interesting- The Fed has Finally Broken the Glass

We’ve been railing frequently about the misguided efforts by the Fed to rein in inflation. After priming the pump way too long with zero interest rates, they have finally had their come to Jesus moment and now are furiously raising interest rates.  I believe this is very misguided, akin to economic criminal neglect if there were such a thing. Inflation is a complicated animal and certainly, some of the causes of this most current bout are based on things that the Fed has no control over.  For example:

1. We’ve been importing deflation for decades due to offshoring manufacturing in low-wage countries like China. That’s coming to an end as nearshoring is the rage as we’ve woken up to the belief that the CRP is not our friend but our foe.

2. Fighting climate change is not free. Going green is not cheap either.  The effort to combat global warming is just beginning in earnest, and it will be a war not unlike the REAL war we are financing in Ukraine. Wars are expensive and not economically productive just the opposite, but they are existential, and you come to that conclusion when you have no alternative.

3. Once in a hundred years pandemic has disrupted supply chains in ways that we could not have imagined and continues to disrupt with China’s zero covid policy.

4. Largest land war in Europe since WWII.

Oddly enough with this much uncertainty and danger to the political and economic order, the last thing in the world you would expect rational actors to do is to raise interest rates to counter the above factors.  In fact, I would expect the opposite approach, but that’s not what we get. We have a Federal Reserve with hundreds of PhDs that can’t see the forest for the trees and a Fed Chairman that doesn’t want to be remembered as the guy that let the inflation genie out of the bottle.  Instead, he will be remembered as the idiot that caused a global recession and broke the bank with high-interest rates.  As usual, the generals are always fighting the last war, not the one they have today.  Now it should get Interesting- the Fed has finally broken the glass.