As you probably know, the Fed’s mandate is to maintain a stable economy by watching two factors: (1) the inflation rate, and (2) the employment rate. Inflation is to be maintained at 2%, and unemployment should be held around 4.25%. Because this chart from the Fed itself.
Now as you can clearly see, that chart doesn’t say anything other than “these two lines cross here”. There are many papers written, doubtless after countless heads were scratched, justifying the positioning of these two lines. And, the selection of those two criteria.
But are those what the Fed should be following? Even deeper, should the Fed be tampering with our “free market” economy at all? Or should they only meddle at extremes, rather than try to maintain very specific numbers?
Those are really, really big questions. Countless PhD theses and academic papers have been written with models, math, history, and logic formally placed to posit and defend positions and beliefs about these things.
We’ll leave you to ponder those and present just two ideas today – reasons why the Fed should NOT lower interest rates today. Even if they do.
First: On the inflation front. The Fed claims inflation is under 2%. Yet the metric they use to measure inflation is known and proven to be highly flawed. The most basic flaw is that the metric is changed whenever “somebody” doesn’t like the result it gives. Over time items have been substituted and amounts of things included have been reduced to give lower-than-actual inflation rates. This was probably done for political reasons because math models don’t change themselves – at least not in pre-AI 1977 when this particular model was created.
If you simply go back to the original base definition of that metric and apply it today you get an inflation rate (as is done by ShadowStats) just above 5%. If my math doesn’t deceive me, 5% is way more than 2%, and so by the Fed’s own “rules” they should raise the interest rate to contain inflation.
Lowering interest rates while inflation is high will goose inflation, not contain it. That’s point #1.
Second: Unemployment. The Fed’s own target chart (cited above) shows a target of 4.25%. According to the US’ own U3 unemployment rate, as of July 5 the U3 unemployment rate was 3.7%. Again, using trusty math, 3.7% is lower than 4.25%, so the US is over-employed compared to the Fed’s target. So, no economy-goosing is called for; in fact the opposite.
So, using the govt’s own metrics, the Fed should in fact RAISE interest rates today, to contain inflation and raise unemployment. (But we know they won’t. The best we can hope for is that they leave rates alone. Which we don’t believe they will.)
Sadly, despite this demonstration of astonishing logic and math, your friendly Gold Enthusiast will not be running for President this time around. Unlike too many others.
The Gold Enthusiast
DISCLAIMER: No specific securities were mentioned in this article. The author has no positions in overall-market financial devices other than savings accounts at local- and national-level banks.
The SPDR S&P 500 ETF Trust (SPY) was trading at $300.40 per share on Wednesday morning, down $0.32 (-0.11%). Year-to-date, SPY has gained 13.02%.
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About the Author: Mike Hammer
For 30-plus years, Mike Hammer has been an ardent follower, and often-times trader, of gold and silver. With his own money, he began trading in ‘86 and has seen the market at its highest highs and lowest lows, which includes the Black Monday Crash in ‘87, the Crash of ‘08, and the Flash Crash of 2010. Throughout all of this, he’s been on the great side of winning, and sometimes, the hard side of losing. For the past eight years, he’s mentored others about the fine art of trading stocks and ETFs at the Adam Mesh Trading Group.