CEOs Need To Start Putting Economists On The Payroll, And Fast

While most of us spent the first few weeks of August tuned into the Olympics and preparing our kids to go back to school, there was at least a portion of us thinking, and talking, about interest rates.

Will interest rates be reduced in September? Should they have been reduced in July? Will ‘higher for longer’ take us through the election, or perhaps to year’s end? These are all good questions, and really important questions, for those looking to buy a house, buy home furnishings, or buy a new car.

What will happen with interest rates is also important to businesses — businesses that are not cash-rich, anyway. Profit center managers, unless you're Tim Cook, need credit to operate their businesses. Credit helps them manage cash flow and gives them purchasing power.

Rising interest rates became a 'thing' for consumers to contend with in March 2022 when the Federal Reserve Bank began to raise rates to combat inflation. In June 2022 inflation peaked at 9.1 percent. The Fed raised interest rates continually -- either a quarter or half point -- every three months through July 2023.

The basic concept is… you raise interest rates to make things more expensive, once things are too expensive, consumers will stop buying them, once consumers stop buying things, prices will begin to fall, and inflation will be contained. The concept is based on the Law of Supply and Demand.

When the Fed raises interest rates to battle inflation, some parts of the economy love it. For instance, big banks love it when interest rates go up, because people, generally speaking, move money out of the stock market and into banks so they can realize the benefits associated with the higher rates. On the other hand, home builders, home improvement retailers, and car companies hate it.

The Federal Reserve has a dual mandate. The Fed is tasked with, one, keeping prices of products and services in the economy stable and, two, keeping Americans working.

On August 2nd, we learned there was a drop in hiring in July — and it was substantial. Only 114,000 jobs were added during the month. With far less hiring taking place, the unemployment rate rose for the fourth consecutive month. The unemployment rate now stands at 4.3%, the highest it has been since October 2021.

This is the reason everyone is talking about interest rates right now. People are questioing whether the Fed went too far, in its desire to combat inflation.

With unempolyment on the rise, most people -- most economists -- are betting the Fed will begin lowering interest rates in September and will lower rates three-quarters of a point before year's end. We will know for sure when Fed Chair Jerome Powell speaks to the issue from the annual Fed summer meeting in Jackson Hole, Wyoming on August 23rd.

I, for one, hope to hear from Mr. Powell that the Federal Reserve will lower interest rates a full point before the end of the year. I am calling for a half point reduction in September (as the July jobs report suggests the Fed is late to the game in lowering rates) and two, guarter-point reductions -- one in November and one in December.

I applaud the Federal Reserve for dealing with the inflation issue and not totally crippling the economy. But, having said that, it is time for the Fed to reverse course. Too many of my friends in the auto sector have paid too high a price.

The concept of "higher for longer" was embraced by the Fed in 2023 and 2024. Hopefully, now, the Fed will warm to the concept of "lower and sooner."