Following the recent Federal Open Market Committee (FOMC) meeting, Chairman Powell officially announced a decision to increase interest rates by another quarter-point. This move brings the Federal target funding rate to 5.25-5.5%, marking the highest rate in over two decades. However, it is important to note that these past two decades were characterized by perpetually low rates, the lowest in U.S. history.
Chairman Powell summarized the FOMC decision by highlighting the moderate pace of economic growth, robust job gains, low unemployment rates, and elevated inflation. Powell emphasized the Federal Reserve’s commitment to combating inflation and maintaining price stability, which is crucial for a functioning economy.
While higher interest rates may benefit creditors, they pose significant challenges for debtors. Individuals and institutions that rely on credit, including the U.S. government, banks, businesses, and American households, are experiencing difficulties as a result of these increased rates. The U.S. government, as the world’s largest debtor, provides a clear example of this impact.
Historically, the government has engaged in deficit spending, accumulating significant amounts of debt. Instead of paying off old debts, they have rolled them over into new loans. When interest rates were low, the government borrowed substantial sums of money at low costs. However, with the recent 5% rate increases since February 2022, the government is facing skyrocketing interest expenses. Instead of eliminating existing debts, the government is accumulating new, more expensive debts to pay off old ones.
Data shows that the majority of federal debt, about 90%, is used for paying off old debts rather than funding essential sectors like defense or public safety. Debt service payments are rising at a much faster rate than tax revenue, indicating a concerning debt trap. Governments have the advantage of being able to print their own money to prolong bankruptcy, while businesses do not possess this capability.
Experts warn of a potential bankruptcy crisis as businesses are forced to renew their financing at higher interest rates. Corporate defaults are already accelerating, surpassing the immediate impact of the pandemic. Lending and banks are also negatively affected by higher rates, contributing to a contraction of credit and a decline in liquidity across the banking system.
The effects of higher interest rates extend to average American households as well. Many rely on borrowing to cope with rising prices, but tighter credit conditions make this increasingly difficult. Consumer debt has reached record highs, exacerbating the consequences of higher rates.
Given these challenges, it is expected that the Federal Reserve will prioritize “financial stability” over its fight against inflation. However, the question remains: will a credit crisis lead to a severe recession or will the Fed resort to quantitative easing and money-printing, fueling another inflationary surge?
In light of an increasingly unstable economy, the concept of global de-dollarization is gaining attention. People are seeking alternatives to the rapidly devaluing currency of a financially strained nation. Physical precious metals like gold and silver are considered safe-haven assets that can diversify savings and preserve purchasing power during economic crises. Individuals are encouraged to educate themselves about these assets to make well-informed decisions.
Overall, the decision to raise interest rates has undeniable consequences for various sectors of the economy. It is crucial to carefully navigate these challenges and consider alternative investment options to maintain stability in an increasingly volatile economic environment.