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Why The Fed Probably Can Never Raise Interest Rates

Why The Fed Probably Can Never Raise Interest Rates

Paul Volcker was the 6 foot, 7 inch tall Fed Chairman who raised the Fed Funds Rate to 20% in 1980 and shoved the United States into a massive recession.

As a reminder, the Fed Funds Rate is the rate that banks charge each other to borrow “reserves” overnight, and it is currently 0% – 0.25%.

Volcker, who was appointed by Jimmy Carter, broke the 1970s inflation with his actions, and he was re-appointed by Reagan in 1983 despite the fact that Volcker crushed the economy.

The recession was horrible, as the ultra-high rates brought the economy to a standstill and unemployment hit 11%.

It took enormous political will to endure that much economic damage.

And that type of political will is in very short supply nowadays for many reasons, including the often misinformed, dishonest and overblown reactions from today’s journalists and social media icons.

In mid-June, the Fed talked about the possibility of raising rates almost 2 years from now, and stocks tanked (worst week since October) and interest rates shot up.

The markets reacted so negatively to the mere mention of higher rates down the road b/c investors know that our economy cannot begin to afford higher rates.

GOVERNMENT DEBT

Total Federal Debt is about $28 trillion and growing, while State and Municipal debt is approaching $4 trillion.

The interest paid by the Federal Gov’t for its debt this year will be just under $400 billion, with gov’t debt rates around 2%.

If rates returned to even 1990s levels (6% to 8%), interest owed would triple or quadruple and quickly bankrupt the government (or make it even more bankrupt, depending on your perspective).

Suffice it to say that neither the Federal or State and Local governments can begin to afford higher rates.

CORPORATE DEBT

There is about $11 trillion of corporate debt in the U.S., and this may be the biggest concern of all.

This is b/c many of those corporations could not begin to service their debt if rates went up.

There are in fact over 600 “Zombie Companies” that do not make even enough money to service their debt let alone invest and expand.

These companies depend entirely upon cheap capital and bailouts.

HOUSING

While existing mortgages do not depend on low rates, as they are long-term and fixed, housing itself represents a huge chunk (almost 18%) of the economy and the sector is now dependent on super-low rates too.

Significantly higher rates would severely impact affordability and potentially tank the entire market.

ENTIRE ECONOMY IS ADDICTED TO LOW RATES

TLDR: The entire economy is addicted to low rates and the Fed knows this.

In addition, the Fed is well aware of the massive economic damage higher rates will foster, including a massive recession, and bankruptcies at every level (private, corporate and government).

Investors know this too and that is why stocks tank every time the mere mention of higher rates surfaces in the press.

WHAT WILL ACTUALLY HAPPEN?

I am just repeating what I heard on several podcasts recently, e.g. Real Vision, as various pundits explained that the Fed will just find excuses as to why “2023 is not actually a good time to raise rates after all” and then just kick the can down the road… again.

So, we will either see a continuation of a Japan-like situation for a very long time with continued low rates, very slow growth, and massive government intervention, or inflation will set in and the Fed will lose control of rates as investors simply demand higher yields in the face of inflation.

Either way – I would not expect the Fed to actually raise rates itself in 2023.

Our entire economy is like an 18-wheeler careening down a curvy mountain road at 80 mph with no brakes; nobody knows how the truck will slow down or what will happen.

Jay Voorhees
Founder/Broker | JVM Lending
(855) 855-4491 | DRE# 1197176, NMLS# 310167

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