Publisher's note: Let the rates drop

By Marty Cayton, posted Sep 26, 2024 on BizFayetteville.com

By the time you read this, Jerome Powell, chairman of the Federal Reserve and the rest of the Federal Reserve board will have undoubtedly lowered the federal reserve borrowing rate by at least 25 basis points or a 1/4 percent. Some expect it to be a higher cut, and it is highly likely that it will be lowered 75 to a full 100 basis points before the end of the year.

The reason the markets are already reacting to this inevitability is the signals being given from Powell himself stating that the inflation target is pretty close to its goal at 2.5% versus the 2% fed target. The poor jobs performance in the last month may keep the initial rate cut down a bit, but a rate cut is coming nonetheless.

But many of you might be asking the question, ‘If inflation is coming down significantly, why are prices still high?’

It’s a fair question, and one that I didn’t know the answer to completely, so I asked AI to help me answer the question. If you’re not sure what AI is by now, you may have been asleep for the last two years, and it’s time to wake up! Of course, AI stands for artificial intelligence, and here’s what AI says, regarding the question that I posed:

While inflation has been slowing, prices are still high because a decrease in inflation means prices are increasing more slowly, rather than falling.

Here are some reasons why prices are still high:

Previous price increases are still being felt.
Previous periods of price increases are still factored into current prices. For example, if a product cost $1,000 in year one and inflation was 9%, the price would increase to $1,090 in year two. If inflation then decreased to 6% in year two, the price would increase to $1,155.40.
Rent is still increasing.
Rent is a key component of inflation, and while it's not rising as fast as it
once was, it's still increasing.
Consumers are still trading down.
Consumers are switching to discount retailers and replacing brand-name goods with generic items.’

I actually looked over many of the articles that this information was sourced from, and it appeared to be accurate, assuming the articles themselves are accurate!

The reality is, although manipulating the federal borrowing rate up brings inflation rates down, competition also has a significant long term impact on inflation. Once again, I asked AI to define how competition affects inflation and this was the answer below:

PRICE MODERATION

Competition can help moderate prices by encouraging companies to lower prices, and by increasing supply and production efficiency.

ECONOMIC FLEXIBILITY

A competitive economy can adapt more easily to changes, which can help minimize the impact of shocks on price stability.

PRICE FORMATION

Competition can help price formation processes function better, which can help inflation persist for less time.

ECONOMIC RESILIENCY

Promoting competition can help strengthen the economy’s resiliency.

In a nutshell, my take on all of this is we need a fiscal policy that promotes entrepreneurship by lowering corporate taxes to incentivize investment and growth. This will increase competition. A lower federal borrowing rate will help businesses invest in supply and inventory. This will help lower prices. A lower rate will also help businesses invest in employment growth. These are key elements to promoting competition and lowering inflation.

Either way, cheers to a lower borrowing rate! Keep it up Fed! Now, on to promoting competition among everyone else.

God bless you and yours!

Copyright © 2024 Enhanced Media Management Inc. dba Greater Fayetteville Business Journal
This story may be displayed, reformatted and printed for your personal, noncommercial use only and in accordance with our Terms of Service located at https://bizfayetteville.com/useragreement.