Jobs Added, the Fed May leave Interest Rates unchanged?
I will probably have New Deal democrats’ commentary up on Angry Bear shortly. This arrived in my mailbox this morning. It would have been up much sooner for readers; except I am about three hours behind many of you. So, this is timely for me.
I agree with Robert Reich and have said what he is claiming as far as corporate control of price increases blaming supply chain is also economic manipulation. It is no surprise to me. Corporations did similar in 2008. There is not much you can do about it except remember and seek suppliers who are not so hungry for short term profits.
There are many Gordon Gekkos out there living for the moment and willing to sell integrity. Enough of the sermon.
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The job machine keeps churning
But the Fed should reduce interest rates nonetheless
By Robert Reich
Substack
The consensus among economists is that this morning’s jobs report, showing that the United States added a whopping 272,000 jobs in May, will cause the Fed to leave interest rates unchanged at their currently high level when the Fed meets next week.
Fed officials still fear the specter of inflation. Average hourly earnings rose 0.4 percent in May from April, and 4.1 percent from a year ago.
But it would be a mistake for the Fed to postpone reducing interest rates. Five reasons:
The unemployment rate for May ticked up to 4 percent for the first time since January 2022. The household survey (which is more indicative of where the economy is than the business survey) paints a picture of an economy that could still tip into recession.
Consumer spending (especially by lower-income consumers) is slowing.
Wage growth has not been a major cause of inflation over the past several years. A bigger cause has been corporate monopoly power to raise prices and keep them high. That’s been particularly true in the food and energy sectors. High interest rates won’t reduce this monopoly power.
The job trend isn’t as robust as some may think. For example, March’s and April’s job reports were revised downward by 15,000 jobs in all.
Finally, high interest rates are hurting Americans with car loans, student loans, credit-card debt, and mortgage debt. Many of these Americans have exhausted their post-pandemic savings. Most are low income. It’s unfair to put the burden of continuing to fight inflation on them.
“High interest rates are hurting Americans with car loans, student loans, credit-card debt, and mortgage debt.”
OTOH high interest rates help Americans living off their retirement savings, saving for retirement, saving for a down payment on a house, for their kids’ college education via a 529 plan, or for future health care expenses via an HSA.
There is a tradeoff between privileging certain groups with low interest rates vs privileging others with high interest rates. Among the major beneficiaries of low interest rates are the wealthy who own most equities.
Isn’t it strange how most mainstream economists hype only one side of that trade off…and are reluctant to acknowledge just how much trickle down monetary policy and the wealth effect of low interest rates helps make fat cats obese.
@John,
Yep. We’ve been here before. I remember when inflation was 14% and I held money markets paying 17% as a grad student. Charged everything and paid off the card every month, so effectively floated a loan of hundreds of dollars interest-free. When interest rates fell, we re-financed our car (back then, car loan interest was tax-deductable). The loan officer was surprised–she was used to people who refinanced to extend payments and we were re-financing to (a) lower the rate and (b) shorten the time to pay-off. Sadly, most Americans are innumerate.
Joel:
I can remember a 12% mortgage. And they said it would never come down again to the 2.5% mortgage we have today.
I forget what the mortgage rate was when we bought our first house in St. Louis back in 1987. We ended up re-financing at lower rates twice, and also accelerating the payment schedule so we paid off the house in 20 years. Haven’t had a mortgage since.
Joel:
No Mortgage is a plus!
The reason why there is not much we can do about it is because anti-trust has been asleep at the wheel since the Reagan administration, captured by the Chicago boys. The reason why companies waited for the pandemic to jack up prices is because demand elasticity is strongly affected by public perception of what is an acceptable price for everyday goods; and the pandemic generated apathy toward prices.
Rick:
I kept it more simple and called it rent-taking because the
Pandemiccompany could in 2008. The company salesman called me and said they were raising prices. and, and if we did not like it, we could go elsewhere. Automotive semiconductor which would take months of testing to confirm. It wasn’t the price increase, it was the manner in which it was presented.I never let him call on me again.
rick:
Having been in some form of supply chain globally, I have found companies will use an economic (which the pandemic resulted in) occurrence each time to their advantage. Does demand actually increase the cost of manufacturing and to what extent? Labor is a small portion of the cost. So we have materials and Overhead left. The same rule applies to materials. What is left is Overhead.
A discussion in “The Goal (1984)” was made by Goldratt about using old technology to supply product if demand is greater. Throughput might be more costly due to less efficiency of manufacture or what I would call throughput. The objective? Satisfy demand even if it minimizes your profit (The Goal).
In 2009(?) a semiconductor manufacturer called me and told me, they were increasing pricing by some percent. The closing comment was take it or leave it. Leave was an impossibility due to it being automotive and the amount of time it would take to replace this chip. I have a long memory and I knew this would come to pass later when I would have an advantage such as source (my input) or use another manufacturer. I have run into discussions similar to this such as lengthen lead time to satisfy demand which is BS. If anything, improve throughput to increase capacity and satisfy demand. There is always a way most of the time.
What chip manufacturers and other manufacturers did by accident in 2008 and are purposely doing during and after the pandemic is weaponizing the occurrences to their advantage. What we are not asking beyond demand elasticity is what are you doing to meet demand?
Public perception of shortages does create increased demand due to a misconception of my larger order will create a greater priority. Price could be a controlling factor in some cases if the product is strategic. In the case of everyday goods which more than likely has capacity to meet demand after ram-up, I would call this rent-taking because they can. Just like the chip maker did in 2009. I found a different source afterwards.
I do not recall my wife being satisfied with the prices of food.
In many respects, I am a dinosaur. They do not teach what I know any more. Orgs like APICs and CPMs have disappeared or commercialized. These Orgs which sponsored certification were taught by practitioners of the discipline.