There are 2 primary reasons:
1️⃣ Higher rates slow the economy
2️⃣ The Federal Budget Deficit is too high
The entire goal of raising interest rates is to slow the economy, make money more expensive, reduce spending, and therefore reduce inflation.
The only problem is that it’s a razor’s edge.
Raise rates just the right amount and you fight inflation effectively.
Raise it too much and bad things start to happen.
Things like… I don’t know… Bank failures maybe…
Companies are weighing their options more closely.
A manufacturer might have bought a new part for assembly on a 2% interest loan,
But he can’t justify it when the loan is 7%.
Situations like this are happening all around us,
And it’s CLEARLY hurting the banks.
BADLY.
On the other hand,
The ANNUAL US Federal Budget Deficit is now over $1.4T.
The interest alone will cost $42B per year at the blended treasury rate of 3.00% (using the latest Federal Cost of Funds Index).
And that doesn’t even touch the principal. That keeps growing!
The current Federal debt is $31.6T. Servicing the debt costs $540B per year!
So considering the new $7T budget that was recently signed,
And tax revenues are under $5T,
It is NOT SUSTAINABLE.
There are a lot of factors at play here,
But they all point toward the US government needing to commit to low-medium interest rates for the foreseeable future (~3 to 6% Fed Funds Rate – current 4.58%).
We’re seeing the consequences of skyrocketing interest rates in real time right now and it’s not pretty…
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