Former Texas Republican Congressman and three-time Republican presidential nominee Ron Paul discusses the latest inflation numbers in June, as well as the likelihood of a rate hike. (Source: Inflation On The Rise, last accessed July 16, 2015.)
In June, the Purchasing Managers Index (PMI), a leading indicator of inflation, increased by 0.4% month-over-month. The reading represents a six percent inflation rate, far higher than most economists had expected. (Source: U.S. Bureau of Labor Statistics, last accessed July 16, 2015.)
Paul believes that although the prices are going up, policymakers in the Fed won’t be as happy as they’re supposed to be with the higher inflation.
He also told viewers that when inflation goes higher, it would even push the Fed to back off from their guideline to raise the interest rate. The Federal Reserve has been hesitant to raise the interest rate as they think that higher rates may push back the economy into another recession.
The Fed plans to raise the federal fund rate after being kept near zero for almost a decade. A higher inflation rate and slow economic growth could make it impossible for a raise in the interest rate.
“I don’t expect the Fed to raise the interest rate but time will tell,” Paul said.
If the Fed doesn’t increase the interest rate, it suggests that the economy is not strong enough without being able to bear it. For this reason and the fact that the Fed may lose its credibility to control the market, the Fed is pushed to prepare the mainstream to increase the federal fund rate in September or later this year.
“They believe now that they prepared the market now for a little increase in interest rates,” Paul also added. “In theory a fraction increase in interest rate shouldn’t hurt.”
In respect to the labor market, he insists that the reason unemployment is declining is because more Americans have left the labor market causing the labor contribution rate to shrink significantly. “Full-time employment was getting much worse,” he points out.
The real solution, in his view, is to let the market set interest rates.