Feb 18th, 2023: The impact of rising interest rates on the consumer and government debtThis has been the second consecutive week of rising interest rates. The swing back down has been particularly fast in the bond market, where U.S. Treasuries have reversed almost all of the early-year rally. This has sent the 10-year Treasury yield back to around where it finished last year, approaching 3.82%. Stocks have kept more of the gains this year because last year finished on such a down note from all the tax loss selling, especially in all the technology stocks that blew up in 2022. Almost all the market gains this year are attributed to the worst performing stocks in 2022.
There are now more concerns about a more aggressive Federal Reserve. Cleveland Fed President Loretta Mester said that she sees a compelling case for rolling out another 50 basis point hike, and the US central bank has to be prepared to move interest rates higher if inflation remains stubbornly high. This sentiment has been reinforced by the two inflation reports released this week, which have shown that inflation remains high. Investors now believe that the Federal Reserve will be required to battle inflation for a more extended period than anticipated.
The US government debt and consumer debt are both at record highs, and this has significant implications for the economy. Higher interest rates would increase borrowing costs, making it even more challenging for families. The last quarter of 2022 saw credit card balances reach a record high of $986 billion, and the share of credit card users making payments that were at least 30 days late, also known as early delinquencies, rose last quarter. The US government debt has been increasing steadily over the past few years, from $28.4 trillion to $31.5 trillion. If interest rates continue to increase, borrowing costs would rise, making it more difficult for individuals and the government to service debts. For consumers, higher interest rates would mean more expensive credit card debt, car loans, and mortgages. This would result in less disposable income, lower consumer spending, and a potential slowdown in economic growth. For the government, higher interest rates would increase the cost of servicing its debt, which would mean higher taxes, reduced government spending, or both. This could lead to slower economic growth and reduced services for citizens. This is why I believe these higher interest rates will begin to fall in about a year.
On a positive note, economists predict that inflation will slow to 3.1% by year-end. These weekly and monthly economic releases have created a toxic environment for day traders. On the other hand, markets must seem calmer if you only glance at market levels occasionally. There hasn’t been much market appreciation over the last 18 months and any major losses for long-term investors have been in the bond market.
The risk continues to be that the stocks are becoming more pricey when compared to cheaper bonds as interest rates move to over 5%. I’ve been consistent in my belief that if the Fed moves rates beyond 5%, they will place major stress on the economy. You can only control so much in the economy, and it would be nice if the Fed realized that rising interest rates to these levels is like taking a sledgehammer to the economy. You can put me in the camp that it’s time for the Fed to let the markets figure this one out and step out of the way.
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This has been the second consecutive week of rising interest rates. The swing back down has been particularly fast in the bond market, where U.S. Treasuries have reversed almost all of the early-year rally. This has sent the 10-year Treasury yield back to around where it finished last year, approaching 3.82%. Stocks have kept more of the gains this year because last year finished on such a down note from all the tax loss selling, especially in all the technology stocks that blew up in 2022. Almost all the market gains this year are attributed to the worst performing stocks in 2022.
There are now more concerns about a more aggressive Federal Reserve. Cleveland Fed President Loretta Mester said that she sees a compelling case for rolling out another 50 basis point hike, and the US central bank has to be prepared to move interest rates higher if inflation remains stubbornly high. This sentiment has been reinforced by the two inflation reports released this week, which have shown that inflation remains high. Investors now believe that the Federal Reserve will be required to battle inflation for a more extended period than anticipated.
The US government debt and consumer debt are both at record highs, and this has significant implications for the economy. Higher interest rates would increase borrowing costs, making it even more challenging for families. The last quarter of 2022 saw credit card balances reach a record high of $986 billion, and the share of credit card users making payments that were at least 30 days late, also known as early delinquencies, rose last quarter. The US government debt has been increasing steadily over the past few years, from $28.4 trillion to $31.5 trillion. If interest rates continue to increase, borrowing costs would rise, making it more difficult for individuals and the government to service debts. For consumers, higher interest rates would mean more expensive credit card debt, car loans, and mortgages. This would result in less disposable income, lower consumer spending, and a potential slowdown in economic growth. For the government, higher interest rates would increase the cost of servicing its debt, which would mean higher taxes, reduced government spending, or both. This could lead to slower economic growth and reduced services for citizens. This is why I believe these higher interest rates will begin to fall in about a year.
On a positive note, economists predict that inflation will slow to 3.1% by year-end. These weekly and monthly economic releases have created a toxic environment for day traders. On the other hand, markets must seem calmer if you only glance at market levels occasionally. There hasn’t been much market appreciation over the last 18 months and any major losses for long-term investors have been in the bond market.
The risk continues to be that the stocks are becoming more pricey when compared to cheaper bonds as interest rates move to over 5%. I’ve been consistent in my belief that if the Fed moves rates beyond 5%, they will place major stress on the economy. You can only control so much in the economy, and it would be nice if the Fed realized that rising interest rates to these levels is like taking a sledgehammer to the economy. You can put me in the camp that it’s time for the Fed to let the markets figure this one out and step out of the way.