It's possible that other people don't have the same viewpoints as me, but the fact that I've lived through four big financial crises, including the dreadful stagflationary period that lasted from 1976 to 1982 and saw the prime rate reach 21% during that time period, has helped me form a few viewpoints along the way.
In May 2023, Jerome Powell, the president of the Federal Reserve Bank, implemented the tenth rise to the Fed Funds rate, which resulted in an increase in the rates by an additional 25 basis points. This resulted in the prime rate reaching 8.25%, the highest level it has been in nearly 20 years. This cycle of rate rises was the most fast in US history, reflecting the Fed's slow discovery that inflation was real and concrete and not ephemeral as was initially supposed. This realization led to the Fed's belated realization that inflation was real and tangible.
As of this point in the second quarter of 2023 and continuing ahead, I'm very certain that we will see another 25 BPS hike in both the Fed Funds rate and the Prime rate, probably within the next month or two, barring some unexpected occurrence that prompts Powell to pause in his plans.
It is possible that Powell will step down from his position if there is a significant drop in the current inflation rate or widespread acknowledgement of a severe recession. Either of these events could persuade Powell to change course and reduce interest rates more swiftly. The presidential election cycle that will take place in 2024 is another event that, on average, results in decreased interest rates, increased pump priming, and more monetary stimulus. In many cases, presidents of the Federal Reserve give in to political pressure. Even if Powell hasn't shown much of a flinch in recent statements, this might quickly change if past Fed acts are any indication of how the Fed will behave in the near future.
1.Technical Aspect: Today, the BTC 1D K-line continues to receive support above the EMA (144,169) Vegas channel. The OBV shows a rising trend, and the downward momentum of MACD is converging.
— BitCarl (@bitcarl6) June 14, 2023
News Aspect: The Federal Reserve's interest rate decision will be announced on June 15th pic.twitter.com/gHHey7Fjik
There is a possibility that Powell will be forced to raise interest rates by an additional tick or two in order to finally put an end to inflation. When he considers the harm that has been caused by ten rate hikes in the past 17 months, there are likely other considerations that will cause him to hesitate. There is evidence of damage pretty much wherever we turn, not the least of which are the precarious financial situations of the majority of small and medium-sized banks and the fluctuating values of commercial real estate. Predicting the activities of the Federal Reserve may be called a blood sport, especially if the repercussions of mistakes made in recent bets are any indication of the direction those consequences will follow. We have seen damage reports totaling trillions of dollars as a result of the failure of CEOs of some of the largest corporations to accomplish their responsibility of evaluating what Powell would do.
It's possible that a couple of moderate rate increases over the course of the rest of the year may help bring inflation under control; nevertheless, the fallout could easily be severe, including a severe economic downturn, a significant decline in the stock market, additional harm to the lending industry, or detrimental impacts on the value of real estate. D, it's also possible to do all of the things listed above. Whoever is caught staring as Powell decides which path to go will have their heads given to them. Those who make accurate predictions can practically become billionaires overnight. due to the fact that this is a game of craps played at the highest levels.
This indicates that Powell will not have an easy time with anything. He is still in a difficult position regarding the question of whether he should raise rates once more, take a break for some period of time, or lower rates once more. This will further exacerbate the current state of the American economy, along with the inevitable knock-on effects that will be seen all over the world, if he continues to force rates upwards through 2023 before making a nominal turnaround sometime in late 2023 or at least by early 2024. Although it is a well known truth that things are breaking right now as a direct result of the most rapid increases in interest rates in the history of the United States, the china closet is still full of fragile items. Everything is still in jeopardy as the Federal Reserve continues to charge around the shop.
Which of these will give way first? Will it be the economy of the United States or Powell's determination to defeat inflation? In retrospect, between the years 1980 and 1982, former Federal Reserve Chairman Paul Volcker implemented a stop and a pivot, only to witness the inflation rate rise once more in conjunction with two consecutive economic downturns. He rapidly changed course by returning to tried-and-true tactics of increasing interest rates, which ultimately proved successful in bringing inflation under control during the years 1982–1984.
As Powell reads his monetary history, he finds himself in a difficult position: he must decide whether or not to raise the prime rate to 8.5 percent within the calendar year of 2023, and he must also decide whether or not to fire a few more shots at taming inflation. All the while, he must keep his foot on the rate pedal to ensure that he does not make the same mistake as Volcker, who lowered rates before inflation had been eliminated for good.
relatd link: The Expert Analysis on Three Stocks for the Week Cathie Wood is putting all of her hope for a comeback into this.
This course of action might, over the course of time, bring inflation under control; however, moving forward, it will raise both the cost of living and the expense of conducting business. A cost that contributes to inflation by virtue of its very nature is interest. It permeates all levels of the cost structure and influences the various expense components regardless of whether or not loans are in existence. Even if interest rates were to remain stable at the current, higher levels, this would still result in a significant rise in the national debt and more inflation.
The interest that was being paid on the United States' $32 trillion in debt also increased at a rapid pace as all other government expenses skyrocketed. The most excruciating aspect of the situation is the reality that inflation can persist for years when prices cannot fall because of these cost reasons. It would appear that significantly higher pricing are going to be the norm for the foreseeable future.
A couple of trillion dollars here, another couple of trillion dollars there, and pretty soon we'll be talking about real money. As we move toward the end of 2023, we will witness another $2 trillion in debt accrued by the federal government. This debt will be visible for as far as the eye can see. Regardless of whether or not the Federal Reserve engages in monetary pump pumping during the presidential election cycle, the United States' national debt will increase by at least $2 trillion between the end of the federal fiscal year in 2024 and the beginning of the fiscal year in 2025. No matter who is doing the calculations, elementary mathematics is rather straightforward. The amount of debt will continue to grow and spread like weeds or rabbits.
The settlement to the debt ceiling did not include anything major in terms of spending caps. There is a good chance that the federal government will run an even larger deficit, which would be very inflationary on its own. An unchecked increase in federal spending and debt is one of the most significant contributors to inflation and is a head of the Inflation Hydra. It is exceedingly difficult to eradicate since it makes its presence known in all debt markets at the same time that this expenditure displaces other investments that need loans at reasonable prices in order to function properly.
The significant detriment that this rapid increase in US debt poses to the country's credit rating is seldom ever highlighted. much if it places a significant burden on the availability of any and all money, the situation becomes much more precarious when interest payments are added to these enormous totals. The interest on the debt currently accounts for half of the federal government's deficit.
The cost of borrowing money on an annual basis is $1 trillion, an amount that is surpassed only by the cost of Social Security. In 1978, the national debt of the United States was one trillion dollars. At this point, all that remains is the debt's interest payment. In reality, the United States Treasury is engaging in a game of "smoke and mirrors" by financing the interest charges by piling it on to the federal debt rather than paying for it as it is incurred.
Because of the necessity to sustain excessive government expenditure, which includes paying the interest on this debt, interest rates are subject to persistent and unavoidable pressure. The United States Treasury is seeking purchasers for this outstanding debt. Although Uncle Sam is legally responsible for repaying this loan, for the time being he is only responsible for paying the interest on it. However, creditors are aware of these actions and will not ignore them. They are aware that Unc may soon exhaust the available funds on his line of credit for easy money. They have the ability to, and will, demand higher interest rates; otherwise, they will look elsewhere to make their investments.
The overall national debt is expected to reach $36 trillion within the next two years, well on its way to $50 trillion by the year 2030 when interest payments on the federal debt pass the $1 trillion mark annually. When Powell considers several approaches to setting interest rates, there will come a point in time when the majority of his choices will be irrelevant. Simply put, he will no longer have any control.
As a result of the exponential growth in the United States government's debt, we are seeing an increasing amount of red ink as debt-driven inflation takes hold in the economy. Increasing rates have the potential to take on a life of their own. Inflation ran rampant and crushed all types of rate jawboning, policy positions, and human control in each and every one of the nations whose debt to GDP ratios soared well beyond 100%. In the end, none of them are able to produce the desired result.
If history is any indication, interest rates will probably return to more normal levels over a period of time, but this won't happen until after significantly more harm has been done. Debt is a bad habit that has a nasty habit of governing all financial worlds, whether that world is a household, a business, or a nation. We might get lucky for a brief period, but debt has a nasty habit of ruling all financial worlds. The days when the United States debt could be handled with relative ease are long gone. With a debt-to-GDP ratio of 1.30 to 1, the Roman river has been traversed by the United States for at least ten years.