They actually did it. Even though banks are collapsing, the commercial real estate market is imploding, home sales are plunging, and large companies are laying off workers all over America, the Federal Reserve just decided to raise interest rates even higher.
This is nothing less than economic malpractice. They know that higher rates are crushing the economy, but they apparently believe that more pain is needed. Officials at the Fed just hiked rates another 25 basis points, and they are now the highest that they have been since August 2007…
The Federal Reserve on Wednesday raised its benchmark interest rate by a quarter of a point, but opened the door to a long-awaited pause in the most aggressive tightening campaign since the 1980s. The unanimous decision puts the key benchmark federal funds rate at a range of 5% to 5.25%, the highest since August 2007, from near zero a little more than one year ago. It marks the 10th consecutive rate increase aimed at combating high inflation.
When the Fed raised rates that high in 2007, it didn’t exactly work out so well, did it?
The next year we plunged into the worst economic downturn since the Great Depression.
Now a new economic crisis has begun, and even CNN is admitting that higher rates will make things even worse…
Meanwhile, investors are still coming to terms with the rapid run-up in rates, which sparked a huge sell-off in US government bonds and stocks last year. Banks that failed to adequately prepare have been hammered. The shifting landscape paved the way for the collapse of Silicon Valley Bank in March and First Republic Bank this week. More pain could be on the way. The commercial real estate sector, which is very sensitive to high interest rates, looks particularly vulnerable — its problems made worse by a glut of empty office buildings in the wake of the pandemic.
In particular, higher rates will put even more pressure on hundreds of banks that are already teetering on the brink of insolvency.
And when banks are struggling to survive, they get really tight with their money, and that is why we are now facing a big time credit crunch…
“The data suggest a credit crunch has started,” Morgan Stanley analyst Mike Wilson said during a recent episode of the firm’s “Thoughts on the Market” podcast. During a credit crunch, banks significantly raise their lending standards, making it difficult to acquire a loan. Borrowers may have to agree to more stringent terms like high interest rates as banks try to reduce the financial risk on their end. Fewer loans, in turn, would lead to less big-ticket spending by consumers and businesses.
If the goal of the Federal Reserve was to curtail economic activity, what they had already done is already working.
So there was no need to hike rates even more.
Just look at some of the things that have happened over the past few days. For example, FedEx Freight has announced that they will be permanently closing 29 locations…
FedEx Freight is closing 29 locations later this year and will begin another round of furloughs for some employees at the end of May, the company announced Monday. FedEx Freight plans to close the locations and consolidate its operations into other locations effective Aug. 13. When asked about where the locations set for closure are, a FedEx spokesperson said the company did not have “that information to share at this time.”
And Vice Media has announced that it is “preparing to file for bankruptcy”…
Vice Media is preparing to file for bankruptcy – after attempts to find a buyer for a company once valued at $5.7 billion appeared to be going nowhere. More than five companies have expressed interest in acquiring Vice, The New York Times reported on Monday, but the chances of a sale are seen as increasingly remote. The decline of Vice comes a little over a week after BuzzFeed News announced its closure, and three months after Vox laid off 130 people, representing 7 percent of staff.
Even GM is feeling the stress of this economic environment. According to USA Today, earlier efforts to reduce their workforce were not sufficient, and so they will be giving the axe to hundreds of contract employees…
General Motors terminated “several hundred” contract employees who worked at its Global Technical Center in Warren, Michigan, and other locations this weekend in its bid to shave $2 billion from its budget by the end of next year. The cuts come nearly a month after 5,000 salaried employees agreed to a voluntary separation package that GM said would help it achieve close to 50% of its cost-cutting target this year alone and prevent further involuntary cuts.
Meanwhile, more retailers continue to go belly up.
In particular, I was greatly saddened to hear that Tuesday Morning “is going out of business and closing all of its stores”…
Tuesday Morning is going out of business and closing all of its stores. It is the second major US home goods retailer to go bust in recent days. The retailer announced on Facebook and its website that it has started a going-out-of-business sale with 30% off discounts on its products sold at its roughly 200 remaining stores. Customers have until May 13 to use their gift cards, and locations will start closing in the coming weeks.
Do officials at the Federal Reserve not understand what is going on out there?
It is a bloodbath, and they just made things even worse.
And it isn’t just us. Economic activity is rapidly slowing down all over the world, and officials at the Fed have chosen this moment to sabotage the central hub of the entire global economy.
If we plunge into an economic depression, the entire planet will feel the pain.
We better hope for a miracle from somewhere else, because economic conditions are deteriorating a little bit more with each passing day, and officials at the Fed have made it abundantly clear that they do not plan to help us.