Remember, the Federal Reserve is supposedly pulling out all the stops right now to tame inflation. And as part of that campaign, they’ve been aggressively raising interest rates for more than a year without any regard or even awareness for the consequences.

Just three days before Silicon Valley Bank’s collapse back in March, the Chairman of the Federal Reserve told Congress that everything in the financial system was just fine.

Yet SVB went bust (three days later) in large part BECAUSE of the Fed’s interest rate hikes; the bank had bought $120 billion worth of US government bonds, most of that in 2020 and 2021.

Now, US government bonds are supposed to be the ‘safest’ asset class in the world. But even government bonds lose value when interest rates rise; this is the immutable law of the bond market-- when rates go up, bond prices fall.

But the Fed didn’t see it coming. They didn’t realize that their rapid interest rate hikes would wipe out banks’ bond portfolios, triggering a wave of insolvencies.

Similarly, they failed to anticipate back in early 2020 that printing trillions of dollars to stimulate the economy during the pandemic would create inflation.

This shouldn’t have been hard to predict. I predicted it. So did a lot of other people. But the Fed totally missed it.

Later they insisted there would be no inflation. Then they wrongly predicted inflation would be ‘transitory’. Then they admitted “how little we understand about inflation”, which is frankly terrifying.

And now they’re raising rates under the foolish assumption that this will solve the problem… proving that the Fed STILL does not understand inflation.

Inflation is the result of a number of complex factors. For example, the Biden administration’s crusade against capitalism has deliberately targeted oil companies. And gee, what a surprise, oil prices have risen considerably as a result of tightening supply. This is a huge driver of inflation.

Conflict is also very inflationary, and there’s plenty of that in the world. During times of peace, economies allocate resources towards productive investments. Trade flourishes. Prosperity booms.

During times of conflict, however, economies allocate towards destruction. Trade wanes. Central banks print a lot of money. And the result is typically higher prices for scarcer goods.

There are also major demographic trends at work. Millions of Baby Boomers are retiring, reducing the number of productive workers in the economy. And it’s the same story with Generation Z, which has millions of people who simply never entered the work force to begin with.

But raising interest rates won’t change any of these trends.

Raising interest rates won’t suddenly turn Joe Biden into an articulate, sagacious philosopher-king. Raising interest rates won’t stop the war or make China back off.

Ironically, though, raising rates CAN actually make inflation worse. And housing is a great example.

In March 2021, the median US existing home sale price was about $273,000 according to Zillow. The national average 30-year mortgage rate back then was 2.96%. So with a 20% down payment, the monthly mortgage on a median (middle class) home in America would have been $924.

Today, the median home sells for about $339,000. With 20% down and a 6.35% interest rate, the payment is now $1,704 per month… 84% higher than in 2021.

This is extremely inflationary.

It might not show up in the official statistics given the squirrelly, dishonest way that the government calculates housing inflation.

But when there are 4 million families in the market to buy a home right now (according to the National Association of Realtors) whose housing costs will soar by 84%, it’s hard to argue this won’t contribute to inflation.