Federal Reserve Interest Rate Hikes : Inflation
By Jeremy Reif, CRPS
The big news from banks in the last few weeks was in their internal financial reporting that account balances continue to trend down for consumers. Speculating on two things. The first is that consumers have spent all or most of their COVID-19 relief money. The second is that despite the lagging inflation warning information that the Fed is reviewing, consumer spending will slow down in the near future. Signaling that the US economy could be close to slowing down despite the unemployment rates and consumer spending.
To some, the Federal Reserve could in fact be compared to a local meteorologist. Both have an abundance of information and tools at their disposal. This helps them formulate an educated guess as to what is about to transpire and therefore make a recommendation. Recently, their recommendation has been to raise interest rates to beat inflation back down to the 2% level. As a reminder, this is a profession where it is okay to be wrong consistently and still not lose your job, and historic inflation has always been closer to 3%.
Why has their inaccuracy been acceptable? There are a ton of moving targets in the data being interpreted. The Fed can’t possibly know or comprehend all the actions and reactions, let alone new global events. In turn, it makes their job essentially impossible to be right, or at least to be consistently accurate, without the need for corrective actions on their part. The Fed Reserve is chasing data out of its control. They are also relying on the efficiency of enough data. Here is the right question: what if they are looking at and scrutinizing the wrong data to make their move? One that comes to mind would be focusing on unemployment data.
Since COVID-19, unemployment data would show that the people who were teetering on the edge of retirement are either back to work because jobs are plentiful, or these people are now classified as out of the workforce and potentially retired. Again, this is not brand-new news. My personal prediction is that unemployment statistics will remain on average lower than what they averaged over the last 40 years while boomers were working.
Here is why, as the baby boom generation retires (as a reminder, the boomer generation is made up of people born 1946–1964): The youngest boomers are turning 59 this year. After the boomer generation, the birth rates in the US dropped. Fewer babies mean there are fewer people available to take over for the largest workforce generation who are about to or already retired. Leaving the unemployment numbers lower than years prior.
What if some of this stable or increased spending is from our newly retired baby boomers rather than numbers driven by the workforce? Many retirees that I personally work with tell me that they would rather spend money when they are young and healthy enough to enjoy it. Many of them are increasing their spending early and then slowing their spending later in life as they are less healthy and are physically unable to enjoy their money.
Let’s explore this theory a little more closely. The Boomers control the wealth in this country in the form of retirement accounts. Suppose inflation is now being driven by most of the boomer generation. Many are retired and drawing from their checking, savings, brokerage, passive income, and retirement accounts. This is a spot where the Fed has been potentially overlooking the data up to this point, or at least it has not been publicly reported that they give this data a higher priority. This does two things: it draws down money that is in banks because people try to avoid paying taxes. Remember, this was one of the major factors at the beginning of the article. The second is that their retirement accounts are single-handedly propping up the economy when the Fed is trying to purposely slow it down to fight inflation.
If this inflation really is the Boomers spending their saved money during their retirement years, this economy and inflation battle could continue to go sideways for a much longer period than the Fed Reserve is thinking. Interest rates will need to be hiked many more times to curtail their spending. Again, this will not curb Boomer spending because they are going to do what they want because they saved for this moment and lifestyle. The real effect of the Fed will have to look closer at different data; otherwise, it risks driving a bigger disparity between how the economy will look moving forward for the next 20–25 years as the Boomers live their retirement. Once the Fed takes this new theory into consideration, how will this affect inflation and how to properly fight it.