Calling Bull On Calling Bull

If you’re not concerned about the Fed’s recent interest rate hike, then you’re not paying attention.  

Don’t care about those academic number crunchers? Well, you should. The Federal Reserve is not a building. It is a group of people that make decisions, and when they get it wrong it can hurt everyone in the U.S., including YOU!

The Fed decides whether interest rates can go up or down. These decisions impact mortgages, credit cards, and car loans, increasing the amount of interest you pay to borrow that money. 

Currently, unemployment is down. With this increase in jobs, the Fed is operating under the assumption that the economy is very strong and that consumers are in a position to spend more on luxuries like a vacation home or kitchen remodel. 

But their thinking is DEAD WRONG!! 

Remember this crucial rule for any data-driven decision: 

When you completely rely on numbers, you BETTER be sure the numbers are painting an accurate picture–and you must challenge the underlying assumptions.

Here’s why we should all be up in arms about the Fed’s latest antics: 

The Fed is blindly relying on data that is misleading–and making far-reaching decisions based on this misleading data. 

When the Fed increases rates and gets it wrong, it could drive the country into a recession. This can mean massive layoffs and the ripple effect they cause. 

In this case the Fed has the wrong assumptions. The last time people blindly relied on bad assumptions, it led to the Great Recession. 

What is their current thinking? 

Since the economy is creating jobs, the Fed assumes that the rise in wages and more consumer spending will lead to a higher cost of doing business, which eventually leads to inflation.  

 It’s true that the economy is creating jobs, but what KIND of jobs? 

If 100 workers with excellent jobs are laid off, and 110 people minimum wage jobs are created, the unemployment rate goes down, but the economy does NOT go up. It kind of goes sideways.

When companies like GM, Bayeror G.E. announce workforce layoffs, these cuts usually impact people with well-paying jobs and great benefits. But the Fed doesn’t consider this part of the data. They are only looking at the number of jobs being filled, not the kinds of jobs. 

Even if a layoff only applies to 10% of the workforce, there is a much bigger ripple effect. Among the other 90%, there may be a sigh of relief, but now, with a layoff hitting so close to home, they know that it could also happen to them in the near future. 

As a result, this 90% does not go out and buy a home, decide it’s a great time to renovate or undertake another large expense. Basic behavioral economics tells you that this 90% will hunker down to protect their financial stability.

Dig Deeper into the Data, Not Our Pockets

A low unemployment rate doesn’t always mean strong consumer spending. People who get a new minimum wage job don’t go out and buy a house, renovate or buy a new car. They try to figure out whether they can maintain the expenses they already have and where to cut, if necessary. Minimum wage earners do NOT stimulate the economy.

Does the Fed consider how people behave as part of the data? No. They only look at the quantity of jobs being filled, not the quality of jobs. Then they assume that since the unemployment rate is low, the economy is booming, and they need to raise interest rates to slow it down. 

The Fed–a body of people whose decisions impact the entire nation–are ignoring that critical rule about good decision making. Instead, they are failing to recognize that the numbers alone do not paint an accurate picture, and they are not challenging underlying assumptions.

Numbers don’t lie, but alone they can paint the wrong picture. Don’t ever make an important decision relying solely on numbers unless you understand all of the assumptions underlying those numbers .