How Much Will The Federal Reserve Have To Raise Interest Rates? A Minimum Of At Least 1,350 Times!

To answer this question, you must start with some basic information. First, the shorter the maturity on US Government Securities, the more the Fed has influence in the rate of interest paid. The shorter the end of the maturity, the greater the influence the Fed can bring to bear. The yield, for example, on short-term 90-day T-Bills has historically been set to equal the rate of inflation. If the yield on the 90-day T-Bills is one-tenth of 1 percent, then, on a historical basis, inflation will be around one-tenth of one percent. Below are two charts: the current interest rate on 90-day T-bills, and the most recent CPI (Consumer Price Index) numbers in 2021. 

Applying the formula to the above, we can understand what is likely to happen to short-term interest rates and indirectly longer-term rates. The most recent T-Bill auction produced an annual yield of .004 percent on an annualized basis. The chart next to the first one shows the annualized CPI in September of 5.40%. Assuming things do get worse, the short-term interest rates should move close to the CPI. ?

If that assumption is correct, interest rates will have to increase 1350 times to get to where they should be under the historical cycle. The longer the fed takes to get the norm, the short rates will have to move higher. You are probably wondering how I got to the number 1350. The answer to the question is quite simple. Take the CPI and divide it by the yield on the 90-day T-Bill. ?

We may be in store for Hyperinflation. We had it under the Carter administration, but none since then, so many of you may not have experienced it or understand it. Here is a simple definition. Economics experience defines Hyperinflation as when the prices of all goods and services rise uncontrollably over a specified period of time. In other words, Hyperinflation is extremely rapid inflation. (1)?

The more the government prints more money with no income coming in, the greater the chance of Hyperinflation. The current Secretary of the Treasury Janet Yellen recently suggested this spate of inflation is transitory, but now she thinks the high inflation will linger through the second half of 2022. (2)?

Depending on where you live, some of the following items may be higher or lower than the numbers I quote:

• Bacon 8.4%
• Fresh Seafood 6.4%
• Milk 7.5%
• Fast Food 6.2%
• Fuel Oil 44.5%
• Gas 45.1%
• Furniture 8.6%
• Washers and Dryers 29.4%
• Men’s pants and shorts 11.1%
• Women’s Dresses 15.8%
• Used Cars and Trucks 45.2%
• Car and truck rental 87.7%

I’m sure you can find even more items whose prices are up higher than this inflation.?

All the money our government spent on COVID-19 has put trillions of dollars in circulation. This massive amount of money has created pressure on items as more products are wanted, but the supply is constrained. The president asked the ports of Long Beach and LA to stay open 24/7. It has been reported that the ports of Long Beach and LA are short 60,000 drivers. ?

Recently President Biden was asked about short-term fixes, and he said he had none. I have raised the issue of poor judgment in making this decision. It seems that the Biden administration cannot figure out the negative implications of their decisions. One of the first executive orders was the canceling of the construction of the Keystone Pipeline. The administration was counting on alternative energy to make up for the shortfall in energy. Very bad decision, and as a result, crude oil has now doubled in price. ?

One last point, the most recent CPI, was 5.4%. Take a look at all the increases in the essential items listed above. Try and find 1 item that has a 5.4% increase. I asked you to do this because I believe that the current CPI does not reflect all the price increases already priced into the system, and as a result, we will see explosive increases in the CPI in the coming months. Hold on to your seat for we may see increases in inflation not seen since Jimmy Carter was President.

NOTES:

1. https://corporatefinanceinstitute.com/resources/knowledge/economics/inflation/
2. https://corporatefinanceinstitute.com/resources/knowledge/economics/inflation/