By skyforbes 
How the Federal Reserve damages American households
History
We have discussed inflation and its effects on the U.S. economy for several months. Four years ago, the Biden administration inherited an inflation rate of 1.4%, somewhat below the ideal target of the Federal Reserve (2.0%).
From his first days in office, the president took deliberate steps to change the current economy, steps that directly resulted in higher inflation. The table below shows how quickly inflation began to grow.
Keystone XL
One of the first steps President Biden took was to cancel the ongoing expansion of the Keystone pipeline that transports thousands of barrels of crude oil each day from Canada to refineries in Texas. That resulted in the loss of thousands of jobs in the U.S. and Canada and the ultimate deficit of American and Canadian GDP by 2–3% each, and it had immediate effect on inflation in the U.S. economy.
At the same time, the president banned drilling for oil on federal lands, a move that led to higher prices for fossil fuels.
American Rescue Plan
In March 2021, Congress passed the American Rescue Plan (ARP), which provided economic stimulus to help the country overcome the negative effects of the COVID-19 pandemic.
The plan provided nearly $2 trillion in direct payments and tax credits and proved to be excessively generous. Unemployment benefits often paid workers more than they had earned in their jobs, disincentivising them from returning to work.
Supply chain
Supply chain interruptions occurred naturally due to unexpected changes in demand caused by COVID-19 lockdowns. Once lockdowns were relaxed, immediate surges in demand resulted in higher prices, which raised inflation further.
Inflation Reduction Act
In August 2022, the president signed the Inflation Reduction Act (IRA), its name implying the law woud reduce the level of inflation. In fact, the IRA might be one of the greatest “confidence tricks” — scams — in our history.
Rather than reducing inflation in the economy, the law provided the greatest climate-related investment in our history. While the Congressional Budget Office projects that the cost for the IRA would total under $400 billion over ten years, Goldman Sachs has calculated the total cost in green subsidies to be $1.2 trillion, more than three times the cost that the law’s supporters assert.
How Inflation Grew
From the beginning of his administration, President stoked the fires of inflation. His efforts in 2021 to reduce fossil fuel use cost thousands of American jobs and resulted in higher prices at the gas pump, and the American Rescue Plan delivered to each household checks that contributed directly to higher prices.
As a result, inflation grew steadily for a year and a half.
Dealing with Inflation
The Federal Reserve Bank (Fed) is responsible for maintaining low inflation and unemployment to keep the economy healthy and growing. It uses monetary policy to adjust the inflation rate by controlling interest rates, specifically the Federal Funds Rate. Inest rates had been low — near 0% — for several years, which had a positive effect on economic growth.
The Fed Response — Too little
Throughout 2021, the Fed considered the growing inflation rate (chart above) a result of the COVID-19 pandemic and merely “transitory”, or temporary.
By early 2022, as inflation continued to grow, the Fed began to raise the interest rate. Seven times in 2022, the Fed raised the interest rate. The early raises were small, but by June 2022, the raises grew to 0.75% — nearly a whole point. The final raise by the Fed was in July 2023.
In seventeen months, the Fed increased interest rates by more than five percentage points.
Fed Waited 13 Months — Too Late
As inflation grew from the first days of the Biden administration, the American Rescue Plan’s generosity poured even more fuel on the fire of inflation.
It took more than one year for the Fed to respond by raising interest rates!
These moves by the Fed proved to be insufficient; the final raise in July 2023 did not aucceed in lowering inflation to, or near, the Fed’s target of 2%.
Evidently confident that the current strategy was succeeding, in late 2024 the Fed abruptly lowered the rate three times.
In fact, 2024 showed that inflation might not return to 2.0% without raises to the interest rate.
Markets or Politics
Why did the Fed, an agency independent of the Executive branch, decide to lower interest rates three times in late 2024?
Throughout the eight meetings of the Fed’s Federal Open Market Committee (FOMC) in 2024, Fed governors had shown increasing confidence that the 2% goal for inflation would be met by current conditions. FOMC had suggested that lowering the interest rate would be possible in the near term.
“The (Fed) has gained greater confidence that inflation is moving sustainably toward 2%, and judges that the risks to achieving its employment and inflation goals are roughy in balance,” was the statement from the Fed on September 18, 2024 following its abrupt drop in interest rates by half a point.
Reducing interest rates makes investment less expensive, so it is quite popular with investors. When the FOMC makes public suggestions, their meaning is generally included (“baked in”) in decisions by the markets.
Fall of 2024 was also election season. Both the upcoming election and expectations of the markets might have influenced the governors of FOMC as they lowered interest rates in both November and December 2024.
Conclusions
The Fed appears to have been making monetary policy based on the needs of the markets, rather than understanding the plight of American consumers.
Whatever the factors were that influenced the FOMC in late 2024, the results clearly show that their decisions were dead wrong.
- Fed dropped the interest rate in September by 0.50%, and October inflation surged from 2.4% to 2.6%;
- Fed lowered the interest rate by 0.25% in November, and inflation jumped to 2.7% in November;
- Fed dropped the interest rate by 0.25% in December, and inflation surged again to 2.9% in December.
The results above prove that the Fed did not know that their highest rate of 5.25–5.5% would not bring inflation down to 2%, at least not in the next year.
The three drops in the interest rate were enough to stimulate demand so that inflation reversed course and grew quickly.
Last Word
As I asserted months ago, it is time to raise interest rates beyond the recent high.
Raise the rate now to 5.25–5.5% and to 5.75–6% in February.
That would shock the markets, but more important than the markets is the confidence of consumers, who have suffered average inflation above 5% for more than four years, during which grocery prices have risen 25%.
This is the surest and fastest way for the Fed to reach its inflation goal.
