The Federal Reserve’s planned interest rate increases will not be effective in controlling inflation and actually may trigger a recession. Raising interest rates is a crude tool to stem inflation. It is like chemotherapy, killing good as well as cancerous cells. The Federal Reserve needs new solutions to the problem of inflation. One tool that it has but has not used to stem inflation is the power to buy corporate bonds.
Raising interest rates may work to keep housing prices down, by raising mortgage costs, but it will raise rents by slowing down new apartment construction.
Most inflation in the United States is in food, autos, rents and gasoline. Raising interest rates will harm, rather than help efforts to bring these prices down.
Auto Prices
We need scalpels to deal with inflation for specific products. Take the auto industry. The price for used cars has jumped 40% from January 2021 to January 2022, according to the US Bureau of Labor statistics. Car and Driver magazine found that “Buyers paid 12.2% more for new vehicles in January, 2022 than in January 2021,”and the picture was even worse for used vehicles, which were up more than 40% year over year.”
A raise in interest rates will not bring down car prices. The increase in automobile prices has been primarily caused by shortages in microchips. A rise in interest rates will not increase the number of microchips produced. In fact, a rise in interest rates may increase the costs for building new microchip factories thus delaying new sources of chips.
Intel, the world’s largest semiconductor manufacturer announced plans to build a new $20 billion factory outside of Columbus, Ohio. The Ohio project, which will be Intel’s first new manufacturing site in 40 years, includes two semiconductor fabrication plants. It eventually could involve eight factories and $100 billion in investment over the next decade, including Intel and its suppliers and partners. Construction is expected to start in 2022, with the first chips being produced by 2025. Intel is also building two new factories in Arizona. That state will also be home to the first US site of Taiwan Semiconductor Manufacturing Co. (TSMC), which is building a $12 billion factory in north Phoenix. The TSMC plant will start producing chips in 2024.
The Fed can help American chip companies by purchasing their bonds. The Federal Reserve has purchased billions of dollars of bonds in Apple, Microsoft and Home Depot. These purchases will not help stem inflation. The Federal Reserve can buy Intel bonds to speed up production of American-made microchips.
US auto manufacturers built 1.7 million fewer vehicles in 2021 than in 2019 because of chip shortages. The problem has been worsened because cars now have more chips than ever to control navigation and safety systems. Every car has at least two or three dozen microchips. The supply of microchips will not catch up to demand for at least a year.
GM President of North America Steve Carlisle warned dealers that GM has the right to withhold allocation of the future Corvette Z06 and the new EVs GM is bringing to market or take “other recourse” against dealers who are charging money above the sticker prices in light of the current shortfall of new vehicles.
When you’re purchasing a new car these days, it may feel a lot like you’re giving your dealership a fat bonus. Eighty-two percent of buyers are paying above sticker price for new vehicles, according to new research from Edmunds.com. That compares with 2.8% a year ago and 0.3% in early 2020.
Car dealers who have been charging more than sticker price should be punished. General Motors and Ford Motor Co. have warned dealers to not charge excessive fees above sticker prices. State and local governments can take legal action against car dealers who are overcharging customers.
Gasoline Prices
The War in Ukraine has increased the price of gasoline. A hike in interest rates will not help bring these prices down. We can take steps to reduce the pain on consumers of high gas prices by suspending state and federal gasoline taxes. Some states have done this already. Eliminating the federal gas tax of 18.4 cents per gallon will help. State gasoline and diesel taxes are often higher than the federal tax.
California has the second highest gasoline prices of any state on the continent with a tax of 51 cents per gallon on gasoline and 68 cents per gallon on diesel fuel. At the same time California has a budget surplus of $45 billion. If California suspends its gasoline and diesel tax for one year it will cost the state $9.5 billion, one fifth of its budget surplus. The California legislature has voted down a proposal to suspend the gasoline tax. This is a big mistake which will lead to more inflation because everything, groceries, clothing and electronics, are all delivered by vehicles that use gasoline or diesel fuel.
Housing Costs
Rents have gone up 17% nationwide year over year according to a recent report from Realtor.com. When interest rates go up, housing costs o up as well. Mortgage rates increase. The Federal Reserve’s rate increases will exacerbate inflation in housing costs not reduce them. We need to build more homes and apartments in order to keep housing costs down.
In the short term, in some cities, rent control needs to be imposed. For example, in Phoenix, Arizona, rents went up almost 30% according to the Arizona Republic. Arizona could limit rent increases to 5-10% per year by enacting an emergency rent control law. Rent control does not work in the long run because it defers maintenance and discourages building new apartments. But in the short run emergency rent controls can allow tenants to survive.
The Federal Reserve Bank can buy bonds from the nation’s largest home builders to spur the building of millions of new homes to help stem inflation. The Bank can also buy bonds in large apartment builders to encourage construction of more housing units. Raising interest rates will discourage building more housing, while buying bonds in construction companies will encourage new construction.
The Fed needs to try different techniques to bring inflation down. Local and state governments can also help by enacting rent control, banning gouging by car dealers and cutting taxes on gasoline. Raising interest rates will not do the job. Bond buying targeted to the construction industry will help keep inflation under control.
Joel Joseph is a lawyer and chairman of the Made in the USA Foundation, a non-profit organization dedicated to promoting American-made products. Email joeldjoseph@gmail.com.
From The Progressive Populist, June 1, 2022
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