I had a chance to ask a couple of investment advisors why increases in the Fed's interest rates are supposed to reduce inflation. I mean, I would think this makes a lot of stuff more expensive.
It was agreed that the Fed's lending rates are tied to lending rates on credit cards, loans and mortgages. If the Fed's interest rate goes up, the interest rates on all these things goes up along with it.
It was also agreed that businesses and sectors that are cash-heavy and would have been borrowing free money while interest rates were near-zero would now be looking to reduce expenses which invariable results in lay-offs and firings (looking at you, big tech) now that the interest on that borrowed money keeps going up with no clear end in sight. Payroll is nearly always the biggest single expense for a business.
From my point of view, the real kick in the crotch was the assertion that the present 3-4% unemployment rate is generally regarded as “full employment”. I said I assumed this is the U3 rate which has generally been reported in public media since the Vietnam War and the Nixon Administration and not the U6 rate which had been reported before this.
I was blown away when both of these guys didn't know about this or what the difference was and had to be told that the U3 rate does not include people who have looked for work and given up, people who have part-time work but can't find full-time work or people who want but can't get more hours. Their term for this was “discouraged workers”.
Their explanation was that increasing costs of goods and housing would be brought back down to earth as more and more people simply couldn't afford them.
So at this point I'm thinking, so let me get this straight: it's basically kind of a “floggings will stop when morale improves” solution for the entire US economy.
Their response? “Yeah, kinda.”
If these guys don't even know that the “full employment” data totally does not include partially and completely disenfranchised workers this is bringing us closer to torches and pitchforks than is good for anyone.