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Side effects of Dr. Fed’s medicine are worse than the inflation disease

by



  • The Federal Reserve implemented 11 interest rate hikes to combat inflation
  • The RCM/TIPP Economic Optimism Index reveals a significant decline in consumer confidence during the period coinciding with rate hikes
  • Beyond economic impacts, the Federal Reserve’s actions have also had psychological and health consequences for Americans

Speaking in a keynote speech at the Federal Reserve’s annual Jackson Hole Economic Symposium in August 2022, Federal Reserve chairman Jerome Powell forewarned Americans that the central bank’s mission to tame inflation would result in “some pain” for US households. Powell said:

While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses.

Dr. Fed’s warning has proven to be accurate, as data now reveal the side effects of the rate hikes, ranging from record-low home affordability to skyrocketing auto loan payments, high credit card interest rates, and recent bank failures, as well as an imminent commercial real estate market crash. Because of high interest rates, the Fed’s operating losses are piling up, and the Fed’s portfolio now shows a $1.3 trillion loss on paper.

But the high interest rates are also taking a psychological toll, eroding Americans’ economic confidence and increasing stress levels, which could potentially lead to mental and physical health consequences.

For this analysis, we consider the following three periods:

  • Pre-Pandemic/Control: This period spans 22 months, from June 2018 to March 2020, and serves as the control for analysis, representing the time before the pandemic.
  • Pandemic: Covering 23 months from April 2020 to February 2022, this period begins the month after the onset of the pandemic and concludes in February 2022, which is the month just before the Federal Reserve began to hike rates.
  • Dr. Fed: Spanning 22 months from March 2022 to December 2023, this period began when the Fed initiated rate hikes in March 2022. Since then, the Fed has increased rates 11 times to 5.25 percent, a 22-year high.

We use the RealClearMarkets/TIPP Economic Optimism Index, a leading measure of consumer confidence, and the RealClearMarkets/TIPP Financial Stress Index to assess how they were impacted during the three periods. This analysis cannot establish causality, yet it is interesting to study their behavior in response to Dr. Fed’s efforts to cure the inflationary economy.

RCM/TIPP Economic Optimism Index

RCM/TIPP index readings above 50.0 signal optimism, and readings below 50.0 indicate pessimism.

Notice the following in the chart below. During the pre-pandemic control period, shaded green, the index was convincingly above 50 in the optimistic zone.

During the pandemic period, shaded blue, the index was mixed. At the onset of the pandemic, the index turned pessimistic. From there, it recovered, only to return to pessimistic territory.

Beginning in March 2022, shaded red, when Dr. Fed injected his medicine of high interest rates, the confidence has convincingly stayed in pessimistic territory.

Side Effects Of Dr. Fed's Medicine Are Worse Than The Inflation Disease

The chart below presents the averages of the RCM/TIPP Economic Optimism Index for the three periods. We present the data for overall, four age groups, and two genders.

For example, let’s look at the overall index for all Americans. The average during the pre-pandemic control period was the highest at 55.1. It dropped to 49.7 during the pandemic and sank to 41.9 after Dr. Fed’s medicine. Interestingly, except for the 25–44 age group, all other age groups and genders display the pattern.

Side Effects Of Dr. Fed's Medicine Are Worse Than The Inflation Disease

RCM/TIPP Financial Stress Index

The RCM/TIPP Financial Stress Index, formerly known as the IBD/TIPP Financial Stress Index, is a one-of-a-kind financial stress metric.

In December 2007, we began using it to track financial stress. The index accurately indicates Americans’ financial concerns about paying bills and making ends meet.

Financial stress can lead to insomnia, weight gain (or loss), depression, anxiety, relationship difficulties, social withdrawal, and physical ailments such as headaches, gastrointestinal problems, diabetes, high blood pressure, and heart disease.

We computed the stress index from responses to the questions: Thinking of your personal finances, compared to the past three months, do you feel more stressed these days, less stressed these days, or feel the same level of stress?

The index ranges from 0 to 100; the higher the number, the more stress. A reading of 50.0 is the neutral point.

Notice the following in the chart below. During the pre-pandemic control period, shaded green, the index was convincingly hugging 50, mostly neutral.

At the onset of the pandemic, the index shot up above 50, reflecting high stress, and stayed mostly below 65.

Beginning in March 2022, shaded red, when Dr. Fed injected his medicine of high interest rates, the stress recorded has stayed in the 65 to 70 range. Incidentally, it recorded 70.5 in October 2023, the highest reading on this index since December 2008.

Side Effects Of Dr. Fed's Medicine Are Worse Than The Inflation Disease

The chart below presents the averages of the RCM/TIPP Financial Stress Index for the three periods. We present the data for overall, four age groups, and two genders.

For example, let’s look at the overall index for all Americans. The average during the pre-pandemic control period was the lowest at 50.7. It increased to 63.4 during the pandemic, climbing to 67.8 after Dr. Fed’s medicine. Interestingly, the four age groups and two genders obey the pattern.

Side Effects Of Dr. Fed's Medicine Are Worse Than The Inflation Disease

In summary, the high interest rates are a burden for American families. Our data show that they have not only destroyed the American dream of home ownership but also severely damaged people’s psychological health.

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TIPP Takes

Geopolitics, Geoeconomics, And More

1. Half Of Gaza’s Population Is Starving, Warns UN – BBC

Carl Skau, deputy director of the UN World Food Programme, said only a fraction of supplies needed have been able to enter the Strip – and nine out of 10 people cannot eat daily.

Side Effects Of Dr. Fed's Medicine Are Worse Than The Inflation Disease

Meanwhile, the Biden administration has used an emergency law to bypass Congress and authorize the sale of some 14,000 rounds of tank ammunition worth more than $106m to Israel.

Israel Defense Forces spokesman Lt Col Richard Hecht told the BBC that “any death and pain to a civilian is painful, but we don’t have an alternative.”


2. Qatar Will Continue To Press Israel, Hamas For Truce: PM – Reuters

Qatar’s PM, Sheikh Mohammed bin Abdulrahman Al Thani, said Doha will continue to pressure Israel and Hamas for a truce despite “narrowing” chances.

Side Effects Of Dr. Fed's Medicine Are Worse Than The Inflation Disease
Israeli PM Benjamin Netanyahu (L) – Hamas Leader Ismail Haniyeh

He added hostages were released from Gaza because of negotiations and not because of Israeli military actions.


3. Yemen’s Houthis Announce Ban On Passage Of All Ships En Route To Israel – Al Arabiya

A military spokesperson for Yemen’s Houthis warned all shipping companies against cooperating with Israel, saying they will be a target of attack in the Red Sea.

Side Effects Of Dr. Fed's Medicine Are Worse Than The Inflation Disease

The Iran-aligned Houthis have been firing at Israel and ships in the Red Sea in a campaign they say aims to support the Palestinians. U.S. warships have shot down several of their projectiles.


4. French Frigate Shoots Down Drones Headed From Yemen Over Red Sea: Military – Al Arabiya

A French frigate shot down two drones in the Red Sea that were heading towards it from the coast of Yemen, the French military said.

Side Effects Of Dr. Fed's Medicine Are Worse Than The Inflation Disease
A French frigate shot down two drones in the Red Sea that were heading towards it from the coast of Yemen, the French military said on Sunday.

An American destroyer shot down three drones last week while assisting commercial ships in the Red Sea targeted by attacks from Yemen, according to Washington, which denounced “a direct threat” to maritime security.


5. Ukrainian Parliament Approves Three Bills Seen As Key To Starting EU Accession Talks – RFE/RL

The Ukrainian parliament approved three bills necessary to start European Union accession talks. President Volodymyr Zelenskiy signed all three, describing them as key to Ukraine’s application to join the 27-member bloc.

Side Effects Of Dr. Fed's Medicine Are Worse Than The Inflation Disease
EU President Ursula von der Leyen – President Zelenskiy

“We anticipate that EU leaders will appropriately recognize Ukraine’s efforts and that the EU will follow through on its related promises,” Zelenskiy said on X. An EU summit next week is to consider whether to start membership negotiations with Ukraine and Moldova.


6. Should Ukraine’s Zelenskyy Hold Elections Amid Russia War? No, Say Voters – Al Jazeera

Since February 2022, Ukraine has faced a full-scale Russian invasion that triggered Ukraine’s martial law, which temporarily suspends elections.

Side Effects Of Dr. Fed's Medicine Are Worse Than The Inflation Disease

But while the Ukrainian public has expressed widespread support for the postponement, some domestic and foreign politicians have questioned whether it contradicts the country’s democratic ideals.

Still, in a nationwide poll in October, eight out of 10 respondents said presidential and parliamentary elections should be postponed until after the war.


7. Russian Opposition Leader Navalny Missing For Three Days, Life ‘At Risk,’ Supporters Say – RFE/RL

Supporters of imprisoned Russian opposition leader Aleksei Navalny say they have had no contact with him for three days.

Side Effects Of Dr. Fed's Medicine Are Worse Than The Inflation Disease
Aleksei Navalny

In a post on Instagram, Ruslan Shaveddinov of Navalny’s Anti-Corruption Foundation wrote that the last information about Navalny was that he had fallen ill in his cell after being subjected to harsh conditions, including limited food, a lack of ventilation, and minimal exercise time.

“Navalny’s only protection is publicity,” Shaveddinov wrote.


8. ‘Unacceptable,’ China Lashes Out At Nations Calling For Taiwan’s Inclusion In COP28 – WION

On Saturday, China went all guns blazing over calls to include Taiwan in the United Nations-backed Conference of the Parties (COP28) Summit in Dubai.

Side Effects Of Dr. Fed's Medicine Are Worse Than The Inflation Disease

Earlier this week, the leaders of four of Taiwan’s diplomatic allies, namely Saint Lucia, Saint Kitts and Nevis, Tuvalu, and Eswatini, called on the UN to include Taiwan in the climate conference.

“This is unacceptable,” a member of the Chinese delegation said, asking for their statement to be entered into the official record.


 9. U.S., Allies To ‘Stand Up’ For Stability In Taiwan Strait – AFP

National Security Adviser Jake Sullivan said that Washington and its East Asian allies would “stand up” for stability across the Taiwan Strait and reiterated their commitment to freedom of navigation in the disputed South China Sea.

Side Effects Of Dr. Fed's Medicine Are Worse Than The Inflation Disease

The U.S. and its Western allies have increased “freedom of navigation” crossings by naval vessels in both the Taiwan Strait and the South China Sea to reinforce that both are international waterways, angering Beijing.


10. China’s Xi Looks To Strengthen Vietnam Ties After Biden Visit – AFP

China’s President Xi Jinping will arrive in Vietnam on Tuesday to strengthen relations.

Side Effects Of Dr. Fed's Medicine Are Worse Than The Inflation Disease
Vietnamese President Truong Tan Sang (L) and Chinese President Xi Jinping (R)

Although China and Vietnam have a border in common, close economic ties, and ruling communist parties, Xi’s two-day trip will be his first visit to the country in six years.

It comes hot on the heels of President Joe Biden’s stopover in Hanoi in September when he sought to shore up support against Beijing’s growing influence in the region.


11. China, Philippines Trade Blame After Boat-Ship Collision In Disputed Waters – AFP

A Philippine boat and a Chinese Coast Guard ship collided near a hotly contested reef on Sunday, with both countries trading blame for the latest such confrontation in the disputed South China Sea.

Side Effects Of Dr. Fed's Medicine Are Worse Than The Inflation Disease
Philippine Coast Guard spokesman Jay Tarriela said the two supply boats and Philippine Coast Guard vessel escorting the mission were water cannoned

The incident happened during a Philippine resupply mission to a tiny garrison on Second Thomas Shoal in the Spratly Islands, a flashpoint for Manila and Beijing.

Longstanding tensions between China and the Philippines over the South China Sea have recently flared.


12. Hong Kong Holds ‘Patriot Only’ Election After Shutting Out Opposition – Al Jazeera

Hong Kong has begun voting in its first “patriots only” district council election following an electoral overhaul that made it impossible for pro-democracy candidates to get on the ballot.

Side Effects Of Dr. Fed's Medicine Are Worse Than The Inflation Disease
The vote follows an electoral overhaul that made it all but impossible for pro-democracy candidates to get on the ballot [Tyrone Siu/Reuters]

Sunday’s vote, which restricts residents to choosing between hand-picked Beijing loyalists, comes after Hong Kongers delivered pro-democracy candidates their biggest win in the Chinese-ruled city’s history during the last district election in 2019.


13. Chinese Methane-Powered Rocket Launches Satellites Into Orbit – Al Jazeera

A methane-powered rocket developed by a private Chinese company has launched three satellites into orbit, a milestone in its mission to test whether the vehicle is ready for commercial liftoffs.

Side Effects Of Dr. Fed's Medicine Are Worse Than The Inflation Disease
The Zhuque-2 carrier rocket, a methane-liquid oxygen rocket by Chinese company LandSpace, takes off from the Jiuquan Satellite Launch Center, near Jiuquan, Gansu province, China [File: Reuters]

The success could boost investor confidence in methane as a potential rocket fuel, which can help slash costs and support reusable rockets more cleanly and efficiently.


14. UK PM Defends Controversial Rwanda Immigration Plan Amid Political Storm – RFI

UK PM Rishi Sunak insisted his government’s latest immigration plan will work, as the issue threatened to split his ruling Conservative party.

Side Effects Of Dr. Fed's Medicine Are Worse Than The Inflation Disease
UK PM Rishi Sunak

Sunak came out fighting after his government’s latest attempt to deport asylum seekers to Rwanda sparked the resignation of his immigration minister, Robert Jenrick. His ex-interior minister, Suella Braverman, also said the law was destined to fail. He urged Sunak to change course on immigration – a major political battleground in next year’s expected general election.


15. Iran Blocks Amini’s Family From Traveling To Accept EU Award – RFE/RL

Authorities in Iran have prevented relatives of Mahsa Amini, whose September 2022 death in custody sparked nationwide anti-government protests, from leaving the country to accept the European Parliament’s Sakharov Prize.

Side Effects Of Dr. Fed's Medicine Are Worse Than The Inflation Disease

Amini’s mother, father, and brother were told at Tehran’s Iman Khomeini Airport that they had been barred from traveling abroad. Their passports were confiscated. The family’s lawyer, Saleh Nikhbakht, who accompanied them, was allowed to travel.


16. Armenia: France’s Arms Sales Are A ‘Provocation,’ Says Turkey’s Erdogan – Middle East Eye

Turkish President Recep Tayyip Erdogan suggested that Armenia should focus on peace rather than fall into traps set by other countries.

Side Effects Of Dr. Fed's Medicine Are Worse Than The Inflation Disease
Turkish President Recep Tayyip Erdogan

French Foreign Minister Catherine Colonna said during a visit to Armenia in October that Paris had agreed to deliver military equipment to Armenian forces following Azerbaijan’s seizure of Nagorno-Karabakh, despite the presence of Russian peacekeepers in the area.

Nagorno-Karabakh is a nominal Azerbaijani territory under international law, with a majority ethnic Armenian population.


17. UN Human Rights Declaration Turns 75 – D.W.

The United Nations General Assembly today adopted the Universal Declaration of Human Rights 75 years ago. The UN General Assembly adopted the document on December 10, 1948.

Side Effects Of Dr. Fed's Medicine Are Worse Than The Inflation Disease

The declaration, which came into force just three years after the devastation of the Second World War, sums up its intentions in its first article: “All human beings are born free and equal in dignity and rights.”


18. CDC Issues Health Alert For Potentially Deadly Rocky Mountain Spotted Fever – UPI Health

The Centers for Disease Control and Prevention has issued an alert for Rocky Mountain Spotted Fever after at least five U.S. residents have contracted the disease since July following travels to Mexico.

Side Effects Of Dr. Fed's Medicine Are Worse Than The Inflation Disease

The CDC described RMSF in an alert issued as “a severe, rapidly progressive, and often deadly disease transmitted by the bite of infected ticks.”

The agency advises people to check themselves, as well as their pets and children, for ticks.

Millennials, Gen Z Still Prefer Physical Greeting Cards Over Digital Ones – New York Post

More than half (54%) of Americans say they still mail their greeting cards versus sending via digital and social platforms, new research suggests.

Side Effects Of Dr. Fed's Medicine Are Worse Than The Inflation Disease

A new survey of 2,000 U.S. adults split evenly by generation uncovered that taking an extra step in the personalization of holiday expressions goes a long way.

Two in three prefer to receive physical cards as opposed to digital ones, including younger respondents who are millennials (62%) or are part of Gen Z (59%).


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Republished with permission from TIPP Insights

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