Odeon Capital Group chief financial strategist Dick Bove is warning that the Federal Reserve is in “deep trouble” as it attempts to battle inflation.
Consumer prices rose by 7% between December 2020 and December 2021 — the highest rate in roughly 40 years. In response, the central bank is expected to hike interest rates three times in 2022 — and at the end of last year, the Federal Reserve announced that it will pursue a more rapid conclusion to their quantitative easing program by slashing its monthly bond purchases.
During an interview with Fox Business anchor Maria Bartiromo, however, Bove warned that “if the Federal Reserve was a private bank… you would say this company is insolvent.”
“The reason why you would say that is because the Federal Reserve’s source of money — which comes from printing, it comes from collecting money from the banks, you know, in reserves, comes from a couple of other places — is in deep trouble,” he explained. “If you would look at that balance sheet, you would realize that more than 100% of the increase in the Federal Reserve balance sheet, in the last 12 months, has come from borrowing money in the reverse repo market.”
“In other words,” he continued, “the Fed is sitting at borrowing money at the shortest end of the curve in order to fund the purchase of long-term Treasuries. The balance sheet is a disaster.”
Meanwhile, inflation continues to erode Americans’ purchasing power. According to the Bureau of Labor Statistics, “real average hourly earnings” decreased by 2.4% between December 2020 and December 2021.
Expressing concern over this reality, Sen. Rand Paul (R-KY) released a new report on Tuesday that details inflation’s impact on American consumers and small businesses.
“$4.9 trillion in COVID-19 stimulus spending has led to one of the highest and most sustained levels of inflation in U.S. history,” the lawmaker said in a press release. “While government stimulus spending was intended as a form of relief, and low and middle-income families as well as small business owners were promised that their taxes would not increase, Americans everywhere are now paying a hidden tax called inflation.”
Paul’s report said that inflation is primarily harming low-income households:
71 percent of households making under $40,000 annually have indicated economic hardships from rising prices, as opposed to just 29 percent of households making $100,000 or more.
Low and middle-income families spend a larger portion of their income on high-inflation items, such as gasoline, used cars, and food. Families in the lowest income quartile spend nearly 40 percent of their annual income on these three categories. As a means of comparison, families in the top quartile spend only 10 percent of their annual income on these categories.
The report added that small businesses are at a considerable disadvantage in comparison to larger companies:
82 percent of small businesses reported raising prices in the last several months, 42 percent reported raising prices by 20 percent or more. 45 percent of small businesses reported taking out a loan to cope with the pressures of inflation in this last year. Large corporations have reported consistent profit margins.
Paul also pointed to Goldman Sachs’ 10,000 Small Businesses project, which found that 86% of surveyed small business owners “are concerned about inflation.”