The Federal Reserve announced last week that it’s raising interest rates by 0.75 percentage point, increasing the federal funds rate to a target range of 3.0 to 3.25 percent. It’s the third straight time the Fed has raised rates 75 basis points, as the central bank rapidly reduces liquidity to the financial markets to help slow down soaring inflation.
The Fed’s decision comes as inflation rages in the US economy at some of the highest annual rates in 40 years, 8.3 percent in August.
On Sept. 29, 2017, the DJIA was 22,405.09. In March 2020, the market dipped to its low point in the last five years at 19,173.98 on March 20th. Friday's (Sept. 23rd) close at 29,540.41. With occasional blips downward, the market (as evidenced by the DJIA) had been on a steady increase since its low point in this century of 7,062.93 on February 27, 2009. Are we in a recession? Yes. Has it been worse? Also yes. Are we experiencing record inflation? Not the highest rate ever, but certainly the worst this century. It has settled back slightly since, but the 9.1-percent increase in June was the largest 12-month increase since the 12-month period ending November 1981.
Prices for food increased 10.4 percent, the largest increase since February 1981. Energy prices rose 41.6 percent over the last year, the largest 12-month increase since April 1980. Motor fuel prices (including gasoline and diesel fuel) increased 60.2 percent over the year. Gas prices increased 59.9 percent, the largest 12-month increase since March 1980. Electricity prices rose 13.7 percent, the largest 12-month increase since April 2006. Natural gas prices increased 38.4 percent over the 12 months ended June 2022, the largest increase since October 2005. Prices for new vehicles increased 11.4 percent, prices for used cars and trucks were up 7.1 percent, while prices for motor vehicle parts and equipment increased 14.9 percent.
We could spend all day explaining why, but in short, there are many reasons. Republicans often call it "the Biden economy." There is no doubt that some of the decisions by President Biden have contributed to the problem. Contrary to one argument we often hear, the decision to stop construction on the Keystone XL pipeline isn't one of them. Had it been allowed to continue, the Keystone XL shortcut wouldn't have been available for use until late next year--probably not until 2024. One decision that has affected gas prices was the stoppage of buying Russian oil. Coupled with the Ukraine war, that has decreased the world availability and hence increased prices.
More important to the increase in inflation has been the increase in the money supply. The stimulus checks that began in the late days of the Trump administration and the larger ones under Biden did what they were supposed to do--they stimulated the economy. They also stimulated prices. The American Rescue Plan put much more money into state, county, and city coffers. Most governmental units have been awash in funds thanks in part to that legislation. It kept the pandemic from plunging us into a recession--but it may have only delayed what is happening now.
Mixed in with the bad news is some more bad news that may have a little 'silver lining' in its cloud. Democrats have crowed about the reduction in gas prices in recent months compared to where they were earlier this year. We've said all along that Biden had little to do with the increase and he also had little to do with the decrease. He did allow using some of our oil reserves, and that may have helped keep prices from getting much higher in the short term--but it's not a long term solution. US Crude Oil in the Strategic Petroleum Reserve Stocks is at a current level of 427.16M, down 31.19% from 620.77M one year ago.
The one good thing is that oil prices--like the stock market--are showing reaction to worries over inflation and other factors that are indicating we are about to enter a serious recession. Oil prices dipped by 5% early on Friday, with WTI Crude dropping to the lowest level since January at $78.74/barrel. Brent Crude, the international benchmark, was down almost 5% at $86.15/bbl; both because of concerns about slowing economic growth and the likelihood of a significant recession.
[On Sunday morning, gas was as low as $3.07/gal in eastern Lincoln County. Diesel was $4.56/gal. In Lincolnton, some locations had gas at $3.17/gal; diesel was $4.56/gal.]
You don't need a degree in economics to understand much of what we can expect in the near future. Inflation will likely continue to be high, bu t will settle back slowly. It will still likely be much higher than it was a few years ago. Gas prices will stabilize. They may not drop much more, but they won't likely increase significantly. The pressures of the recession will make borrowing money more expensive--for mortgages or otherwise. If you have money to invest in bonds, you'll likely get a higher return. Your bank may pay you a little more on your savings account. The shortage of labor will diminish for industries.
We survived the 2008-2011 recession and we made it through the pandemic. We'll make the adjustments necessary and weather the current situation as well.