Ever wondered why the bigwigs at central banks are so keen on hiking up interest rates? Well, it’s not as simple as it seems. Even though it looks like inflation is slowing down, these rate hikes can take half a year to really impact the economy. If the Federal Reserve goes overboard, it could make a recession even worse.
In the U.S., central bankers have two main goals: keeping employment high and inflation stable. When lots of people have jobs, prices tend to go up, and vice versa. There’s this thing called the NAIRU (Non-Accelerating Inflation Rate of Unemployment), which is basically the lowest unemployment can go before inflation starts to rise. Ideally, the Federal Reserve wants unemployment around 4-5% and inflation between 2-3%. But these targets can change over time.
Central bankers also use a strategy called moral suasion. It’s all about persuading people to act in a certain way without using force. For instance, even if they think inflation is going down, they won’t say it out loud. Why? Because if people think the central bank will slow its rate hikes or cut rates, they might start spending and investing more, which could prolong inflation.
Now, let’s talk about the Board of Governors of the Federal Reserve. These folks are already pretty wealthy. For example, Fed Chair Jerome Powell is worth at least $50 million, maybe even over $100 million. When you’re that rich, you’re not really worried about the economy tanking. You’re more focused on your legacy and service.
Until recently, members of the Federal Reserve could trade stocks before making policy decisions. But after public outcry, they can’t do that anymore. Even though they’re rich, it’s hard to resist the thrill of making money in ways others can’t. But now, without the chance to make money from trading, the Board of Governors is focusing on improving their status. They want to bring inflation down to 2-3% without letting unemployment rise above 5%.
In 2020 and 2021, the Board cut rates too aggressively and let inflation spiral to 40-year highs. Now, they want to fix their mistakes. But without personal investments at stake, they can raise rates as much as they want, potentially tanking the economy to force inflation down.
As the economy worsens, the Board of Governors and thousands of Fed employees actually get wealthier. They have less risk and more cash. Plus, working for the Federal Reserve is safer than a private sector job. When private sector jobs are lost in a recession, Fed employees come out on top.
If the Federal Reserve doesn’t ease up on rate hikes by the end of 2022, the recession could get worse. But because the Board of Governors cares about their legacy, they might become more cautious in 2023. But just in case, it’s a good idea to save up some cash. The more cash you have in a recession, the better off you’ll be.
The Federal Reserve has a lot of resources, but they still struggle to manage price stability. Maybe economics is just a really hard subject, or maybe the Fed is too focused on regulating banks. Either way, it’s risky to rely on the government or an individual for survival. You have to depend on yourself.
If central bankers were middle-class people, maybe their decisions would be more moderate. But if you’re rich and don’t need to work, and you want a top government job, you might not care as much about the middle class. You’re more focused on your legacy.
So, what can you do? Focus on increasing your cash flow to weather the storm. Follow an appropriate net worth asset allocation model for your age and risk tolerance. Build relationships with those who determine your destiny. More layoffs are coming, so be prepared.
