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No, She Didn’t!

I have explicitly stated since I started writing this column that I would only touch on politics insomuch as it impacted the economy. Over the weekend, I read and saw numerous times that Vice President Kamala Harris is promoting the concept of price controls. This has NEVER worked! In the most recent example of attempting to control prices, we only need to look south to that economic juggernaut…Venezuela.

When price controls are instituted, the government can feel the glow of stopping the increase in the prices of certain goods. Now back to the real world. In the real world, laws of economics kick in and we see a very different outcome than the one intended by the government. Let’s unpack this a bit. If price controls are put in place, it caps or potentially lowers the price of certain goods. As costs are viewed as cheaper, the demand for that product may likely increase. However, if the profit margin on the production of the good becomes razor thin or disappears, the supply of the goodwill go down. I think we can all remember seeing Venezuelans standing in line to get the few things that were available in stores. I do not think that Americans are ready to sign up for this.

During World War II, the U.S. used ration books for a number of products including meat, sugar, gasoline, and tires. The scarcity of the stamps created an opportunity for a black market to emerge for these products and the mafia was given a golden opportunity to make an enormous sum of money both in selling stolen and counterfeit ration books, as well as creating a black market for these goods. Ultimately, consumers paid more, and the program was a failure. Madam Vice President, let me help you, price controls will be an unmitigated disaster and harm the very people you are trying to protect. It is better to work on reducing inflation, creating economic opportunity, and to allow the economy to grow in a proper way.

We are also impressed by recent retail sales figures, and it shows the U.S. economy remains quite strong. The challenge we have is that if retail sales are expanding and the likelihood of a recession is receding, it may make it tough for the Fed to materially decrease the Fed Funds rate because strong retail sales do not provide the economic slowdown that would allow for a significant change in rates.

We are watching the next releases of employment, inflation, wages, and corporate profits to help us understand to what extent the Fed will be able to reduce the Fed Funds rate. The stock market is assuming and hoping for a series of interest rate cuts to drive further gains. Pundits are decreasing the probability of a recession, and this is what is causing the head-scratching on Fed activity. If the economy is slowing and a recession or serious slowdown is likely, the Fed will be focused on slashing rates to support the economy and employment. If, on the other hand, the economy is not slowing dramatically, the Fed may not have as much cover to materially cut rates. More to come.

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