The Island of Fomc

The Island of Fomc is not in the Caribbean Sea, the South Pacific, the Florida Keys, the Southern Indian Ocean, or off the coast of Great Britain.  It is a description of where the Federal Reserve Board, Federal Open Market Committee (FOMC) policies and actions over the past three years have put the committee – on an island in the financial sea.

The Redneck has written a lot in the past about the failures of the FOMC and that the actions and decisions of the committee have had disastrous consequences for a large part of the United States citizenry.  In the past the committee has always had a bridge or a boat to get back to the mainland.  Today, the committee is out on an island without a lifeline.  All it can do is jump in the water and swim back hoping the members don’t run out of strength and drown.  The United States Congress and the President over the past three years has put the FOMC on their island.  I believe the committee had no idea Congress was going to pass special spending legislation of over seven trillion dollars equaling a 23 percent increase in the National Debt and injecting the seven trillion dollars into the US economy starting in mid-2020.  This rapid spending has now created an equal increase in wages, consumer prices, housing, and fuel.  The charts below from the Federal Reserve Bank of St. Louis shows the level of the M2 Money Supply and from the US Treasury showing the level and growth of the National Debt.

Source – St. Louis Federal Reserve Bank, United States M-2 Money Supply

Source:  United States Treasury Department

Previous rants by the Redneck emphasizes that this is simple math.  If the National Debt goes from $1 trillion to $2 trillion one would say it went up 100 percent.  If the National Debt goes from $20 trillion to $30 trillion it has gone up by only 50 percent.  One can say that is good the National Debt has slowed from growing at 100 percent to only 50 percent.   As I always say, “figures don’t lie, but liar’s figure.”

The FOMC in its efforts to swim back to normalcy is staged to take unprecedented action by continuing to raise the Federal Funds Rate.  The Federal Funds Rate impacts the whole economy.  Most importantly it impacts the cost of borrowing for automobiles, housing, corporate finance, and consumer goods.  We only need to look back to 2008-2010 to see the impact of the FOMC raising the Fed Funds rate.  The FOMC from 2006 to 2008 took the Fed Funds rate from 1% to 4%, a 300 percent increase.  In March 2022, the FOMC started raising the Fed Funds Rate from a zero percent rate by .25 percent.  Since March, the committee has raised the interest rate three more times with the last rate increase in July to current rate of 2.4 percent.  If one can use near zero as a base then the rate has increased 240 percent since March 2022.  Jerome Powell in a speech on August 26, 2022, stated “using our tools forcefully to bring demand and supply into better balance” emphasized the FOMC is swimming for its life and the life of the US economy.  You can read his speech by selecting the tab on the right under the Federal Reserve Bank heading.

WARNING!  Remember the 2009-2010 financial collapse of the financial system.  Our financial reporting systems for US corporations and primarily banks and financial institutions is based on the “mark to market accounting” method.  This means each institution must value its assets and liabilities based on the market value of the asset or liability.  Let’s take a $100,000 home mortgage that was initiated in 2019 with a 3% interest rate.  The holder of the mortgage must revalue the mortgage at the current market value using today’s interest rate (7.05%) for a mortgage.  Math would tell us to yield 7.05% the market value of the mortgage would be worth $42,553.  The holder would be required to record a $57,447 loss on its books.  The Redneck predicts another major financial collapse coming in 2023 and 2024 if the FOMC does what it says it is going to do, continue to raise interest rates.  When it happens, we will all be in the drink with no lifeline!

Today’s report on Consumer Price Index (CPI) increasing to 8.3 per cent signals that the actions taken by the FOMC is the past six months has not begun to cause the CPI to fall.  The FOMC’s stated goal is the maintain a CPI at or near two percent (2.0%).  The FOMC’s action will be a dramatical as Congress’s actions on passing the massive spending bills.

Redneck Economist

September 13, 2022

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