Inflation vs. Recession

Predicting what the economy or even our federal government will do is very difficult. An article in the WSJ by Nick Timiraos has several points to think about.

“The lesson of the 1970s is that the Fed is in charge of inflation, and the Fed can’t flinch”.

“But the landing could be harder if the Fed has to destroy more demand because the economy isn’t able to supply workers, goods and services as easily as it did before the pandemic.”

When the Federal Reserve recently raised the interest rate by 0.75%, they signaled they would continue raising rates this year. Fed officials estimated that rates could rise to around 3.8% next year but ultimately settle around 2.5%. Investors have responded by driving yields on Treasury notes higher but progressively lower from one-year bills to 10-year notes. Interest-rate derivatives, such as overnight index swaps have been interrupted to say that investors expect the fed-funds to reach about 3.3% by year end and that short-term rates will fall to roughly 2.5% by the middle of 2024.

Although the White House has called for allowing Medicare to negotiate prescription drug prices, many are concerned that Washington is relying too much on the Fed monetary policy to reduce demand as the way to fight inflation. Other policies should be employed to increase the supply of goods and commodities. If labor shortages persist, it could make sense to boost legal immigration. There are also proposals to use the Strategic Petroleum Reserve’s exchange authority to put a floor under the price of U.S. crude oil and to separately finance the drilling of new wells. American oil producers could then invest in new wells with less fear of economic downturns or price wars between oil-producing nations.

Giving money to people to pay for higher gas prices is not going to help the inflation problem. The government needs to address supply issues.

If supplies are increased to meet demand, inflation will subside and the economy won’t need to be driven into a recession. Unfortunately many politicians are calling for more money to be given to people to pay for the higher prices which can make the problem worse.

Generally Silicon Valley house prices have been significantly affected by federal economic policies. If you look at long term real estate trends you will see that there is often a significant change around our typical 8-year change in our president. In 2000 we had the dot com boom. In 2007 as a president was being termed out, the housing market crashed. In 2017 expected changes in interest rates drove home prices higher. In 2020, in-spite of Corona virus fears, low interest rates, government stimulus money, and expectations of rising interest rates again helped push home prices higher.

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