Rapidly rising interest rates hold tremendous explosive power for the US economy!
Every U.S. yield curve inversion since World War II has been followed by a recession. Both are currently taking place at the same time. As a result, the monetary policy role of the US Federal Reserve is increasingly retrograde and interest rates are falling again – this too for fiscal policy reasons. This opens up interesting prospects for asset prices and the US dollar for the winter semester after the fall turmoil.
Extreme distortions in US interest rates
The government bond market in the United States is in a state of emergency: interest rates on short-term debt securities are significantly higher than those on long-dated securities. There is also a situation in which policy interest rates, i.e. commercial banks’ short-term refinancing rates with the US Federal Reserve (Fed), could exceed government bond yields. Americans at 10 years old.
Typically, creditors seek to offset maturity risk in the form of higher yields on debt securities with future amortization dates. It is only at the rare stages, when market participants expect a significant economic slowdown with a change in monetary policy, that the phenomenon of an inverse interest rate maturity curve manifests itself.
For the next U.S. interest rate meeting after the September 21 summer break, a small majority of market participants in the U.S. expect a fifth interest rate hike this year to the tune of $200,000. ‘a double movement of interest rates – ie by 0.5 percentage points instead of the regular one. The interest rate is a prime interest rate range of 0.25 percentage point 2.75 to 3.0% per annum (275 to 300 basis points). Currently, the range is 2.25 to 2.5%:
The effective federal funds rate is currently 2.33%. With consumer price inflation at 8.5%, the real prime interest rate is still strongly negative at 6.17%, but if interest rates were raised again by 0.5 percentage point the September 21 would already be on US Treasuries. would be more than the return. Ten-year period (as of August 12: 2.84%; Source: US Treasury Department). This would be the first and second sign of the Fed’s severely delayed rate cycle.
Compared to the previous year, the yield curve went from a normal steep structure to an inverted structure in record time.
reliable bearish indicator
The reason for this rapid reversal, in addition to the Fed’s late start to the rate hike cycle, is the US economy’s high interest rate sensitivity due to a clear asset price bubble and low levels. record debt at all levels.
Today, monetary policymakers in Washington are raising interest rates during an economic downturn. This places an additional burden on businesses and consumers due to significantly higher financing costs for home equity loans, consumer loans, investments, etc.
We have already seen that sooner or later a recession will follow the rise in interest rates. The two are now happening in parallel, as the US economy has been in a technical recession since the end of the second quarter of 2022.
It is therefore not surprising that many market participants, particularly in the stock markets, are already anticipating a change in monetary policy, especially since interest rate pain can quickly disappear before wreaking havoc on stocks and real estate. There are other good reasons to end. markets, which together accounted for nearly 80% of Americans’ retirement savings and assets.
Even before the last “big” Fed rate hike, monthly mortgage payments for US households with an average term of 30 years and a 20% equity share had nearly doubled from about $1,000 per month to $1 USD 963 (source: Mortgage Bankers Association, as of July 2022).
It is therefore logical that more and more owners want or want to get rid of their housing, financed on credit as soon as possible because of the heavy burden due to high interest rates.
At the same time, mortgage availability has declined since the US Federal Reserve completely halted its mortgage-backed securities (MBS) purchase program on July 1. their. Additionally, some mortgages may not be affordable to borrowers due to rising interest rates.
In addition, the lending business of banks is no longer particularly profitable in terms of margins, as institutions borrow money from the Fed or each other in the short term and lend it for mortgages in the long term, among other things. . Addition (Maturity variation). Due to the contrasting situation of interest rates with credit conditions, this forward margin has now largely disappeared.
So it’s no surprise that existing home sales numbers are falling due to all of these stressors for the real estate market:
Interests: The Role of the Midterm Election in the United States
If you were to summarize why the US Federal Reserve started raising interest rates too late, given inflation rates at 40-year highs, it would be under tremendous pressure from the White House following levels of historically low satisfaction. due to. The current presidential elections and the next mid-term elections are taking place.
But now, precisely on the date of the midterm election (mid-term election) on November 8, there is a threat of further discontent among the electorate: until now it has been a disappointment due to a government that was almost incapable of function and high inflation, so very quickly an existential fear can turn, with Biden’s approval rating dropping again due to the 2008 housing crisis.
The 46th President of the United States still benefits from the mortgage moratorium in force until October and avoids massive foreclosures. Additionally, the “climate package” recently passed by the US Congress improves Biden’s approval ratings:
Although the $430 billion package is geared towards reducing CO2 emissions, the world’s second largest climate polluter after China, it is not an economic stimulus package. Because, first, spending has been increased over 10 years and second, the package should not only be fully counterfinanced, but also give the US Treasury approximately $300 billion in additional tax revenue.
Even if the latter does not occur, the stimulus effect amounts to an average of US$43 billion per year, or 0.18% of annual economic output. Compared to the coronavirus outbreaks of 2020 and 2021, it can’t even be seen with a magnifying glass and does little to help US consumers. In addition, many of the measures agreed as part of the climate package will come into force from 2025.
But rising interest rates are already acting like a short-term atomic bomb for the US economy (private homes, businesses and the state), which has a total debt of around US$92 trillion.
With rising asset prices and high interest rate sensitivity of all economic entities (individuals and corporations, state), the Fed’s current monetary policy threatens to end in disaster before the end of this calendar year. .
Already the first sign of a trend reversal at the Jackson Hole central bankers’ conference?
This year’s meeting of central bankers in Jackson Hole, Wyoming, August 25-27, may be the first verbal signal from monetary policymakers for price reform.
Consumer sentiment in the United States, which is already at crisis levels, shows the fuse burning ruthlessly and the fiscal burden of rising interest rates, along with consumer price inflation, have a strong impact.
Systemically important crashes in the financial system, such as the bankruptcy of major real estate financiers, cannot be ruled out if the Fed sticks to its course on interest rates. The following has been experienced repeatedly over the past two decades: a radical change in monetary policy with emergency measures on a scale previously unimaginable to protect debtors.
This will likely lead to a significant weakening of the US dollar and further expansion of the everything bubble (crack-up boom).
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