Wednesday :: Apr 13, 2005

The Lunacy Of Wall Street And The Fed's Current Game Plan

by Steve

Notice the economic scenario that Wall Street and the Fed (and the Administration for that matter) seemed to be cheering right now. According to notes from last month’s Federal Open Market Committee, the Federal Reserve indicated that although its plan for gradual interest rate increases would stay in place for now, it was troubled by price increases and may have to move to a more accelerated pace of interest rate hikes down the road should prices spike upward. Such price pressures seem likely given the price increases in energy, health care, and housing that consumers have seen over the last year. So in essence the Fed is saying we may very well have to raise interest rates at a higher clip in the near future.

And, as Muckdog has said in the past, the Fed and Wall Street actually think that higher oil energy prices are acting as a brake on the economy by driving down consumer spending, thereby forestalling what could be even greater inflation:

Oil import prices climbed higher, pushing gasoline prices up sharply, but, instead of feeding inflation, that may ultimately serve to slow consumer demand. Meanwhile, consumer confidence has slipped, job creation was much slower than expected in March, and the trade gap widened again in February.
"Everybody agrees that the first quarter was very strong, but since then we've had one mediocre employment report, declining consumer confidence and higher energy prices," said Peter E. Kretzmer, senior economist at Bank of America. "The consumer can't go at this pace with these gasoline price increases."

Yet the Fed (and Wall Street by their reaction yesterday after this report was let out) was cheered by the fact that workers won’t be able to keep up with these price increases:

But the Federal Open Market Committee, which sets policy, drew comfort from the fact that wages were climbing slowly and productivity growth had remained strong.

So this is the current thinking at the top of our economy and financial system, to wit, that:

·It is actually good that wages aren’t keeping up with inflation;

·Rapidly rising gas prices are a healthy brake on the economy right now to stifle consumer demand from getting too high;

·It is good that we are sucking consumer spending from buying goods that may create jobs here, into the coffers of oil companies;

·These price increases will eventually lead the Fed anyway to have to increase the pace and amount of rate increases as inflation is locked in during the remainder of the year, which will kill consumers and the housing market.

Do you notice the odd man out in this game plan? We, the consumers. And tell me again why it is a good idea for consumers to find it necessary to redirect their spending from buying goods here at home into the coffers of oil companies where the primary economic benefit flows to investors and those outside of this country in unstable parts of the world?

Am I the only one who thinks that such an economic approach and policy is lunacy, and a recipe for stagflation and a tanking job market, along with a growing gap between inflation and what workers earn?

Is this scenario really something to be cheered?

Steve :: 7:45 AM :: Comments (19) :: Digg It!