Chapter 1: The Federal Reserve's Rate Hike

After a prolonged period of inaction, the Federal Reserve appears to be taking significant steps to combat inflation. The previous increases of 25 and 50 basis points in April and May, respectively, were insufficient and delayed. Expect larger and more frequent hikes as the year progresses.

The Consumer Price Index (CPI) serves as a key indicator of inflation, reflecting an increase of 8.6% over the past year—the highest rate since 1981. Unfortunately, the CPI is likely to rise further as prices for energy, food, and other commodities continue to climb. Additionally, businesses are facing higher wage demands from employees.

By late summer, we might witness the CPI nearing double-digit figures. Simultaneously, the economy is showing signs of stagnation. A reported decline of 1.5% in the first quarter could lead to two consecutive quarters of negative GDP growth, which is a classic recession signal.

High inflation combined with a stagnant or contracting economy is termed stagflation, a phenomenon not experienced since the late 1970s. The primary challenge of overcoming stagflation is that it requires a staged approach rather than a single sweeping action.

To tackle inflation, demand must be curtailed within the economy. This is typically achieved through monetary policy, which involves slowing the growth of the money supply and increasing interest rates—both actions currently being taken by the Fed. However, these measures tend to exacerbate recessionary conditions by further dampening economic activity.

To alleviate a recession, the Fed would need to reverse its current policies, boosting the money supply and lowering interest rates to stimulate demand. However, such actions would likely exacerbate inflation.

Last year, the Fed aimed to stimulate growth by increasing the money supply and maintaining near-zero interest rates, which subsequently led to soaring inflation. Now, as they attempt to reduce inflation, the same actions are likely to hinder economic activity and trigger a recession.

As I have discussed in several columns for Newsmax over the past year, the Fed's gradual approach to rate hikes last year has created a challenging policy landscape.

As interest rates continue to rise sharply throughout the year, many consumers are voicing concerns about high mortgage rates, which are making home purchases unaffordable. This is, in fact, the intended effect of the rate hikes. Inflation is largely driven by excess demand; as the Fed raises rates, some consumers will withdraw from markets for interest-sensitive goods like homes and cars.

This decrease in demand is expected to stabilize housing prices, which have surged by over 15% in the past two years. Furthermore, the cost of credit will increase, making consumers more hesitant to rely on credit cards, which will also help lower demand and curb inflation.

Despite the recent 75 basis point increase, many economists argue that interest rates remain quite low. Thus, additional and more substantial increases will be necessary to effectively combat inflation. Mortgage rates, which dipped to around 2.5% early last year, have already surged to nearly 6%, and by the end of the year, they could approach 8%.

The current economic turmoil can be traced back to government policies. High inflation has been largely fueled by the Biden Administration's restrictions on energy supply, driving prices higher, and by providing unemployment benefits that have inadvertently led to wage inflation.

Additionally, nearly $3 trillion was spent through the American Rescue Plan and the Infrastructure Bill, contributing to excess demand. Furthermore, the Federal Reserve's reckless monetary policies last year have compounded the inflation issue.

We find ourselves in a challenging economic environment, characterized by high inflation and recession. It's misleading to blame this solely on external factors, such as the conflict in Ukraine, or to compare ourselves favorably to other nations, as many have mirrored the U.S. approach.

The Biden Administration has prioritized addressing perceived social injustices and climate change over crafting economic policies aimed at achieving stability in prices, employment, and growth.

This is the state of Biden's economy.

Chapter 2: The Consequences of the Fed's Actions

In this video, the implications of the Federal Reserve's 75 basis point interest rate hike are explored, shedding light on the mechanics behind monetary policy.

This comprehensive video discusses the recent decision by the US Federal Reserve to raise interest rates by 75 basis points in response to increasing inflation, detailing the broader economic implications.