They will have to cut rates, because they can’t keep paying the high interest on the government’s debt[0][1]. There’s no political will to raise taxes and cut government spending (one or the other may happen, but not both)[2]. Keeping rates high on the government’s debt may increase inflation[3].
It’s also part of the Fed’s mandate to maintain employment[4].
Between these factors, it’s more likely rates will be cut.
> will have to cut rates, because they can’t keep paying the high interest on the government’s debt
Not how the Fed works. (And given recent deficits, the Congress isn’t worried.)
> Keeping rates high on the government’s debt may increase inflation
Nope. This is Erdoganomics.
The multiplier effect from credit contraction more than outweighs the new money of marginally-higher rates.
> it’s more likely rates will be cut
This has been Silicon Valley’s hot take since rates rose. Like yes, eventually they’ll have to come down. (There isn’t much room for them to go up.) But the Fed is far from constrained.
> Like yes, eventually they’ll have to come down. (There isn’t much room for them to go up.)
Yup, the economy is cyclical, so they'll come down of course. But they can go way higher, too.
Consider this: From 1978 to 1985 (7 years), the federal funds rate was never below 8%, and from 1969 to 1991 (that's 22 years), it only dropped below 6% during the recoveries from recessions.
I think the last 20 years of ZIRP have hoodwinked a lot of people into believing that sub-5% rates are normal. All the people saying rates "have" to come down and that they will therefore have the option to refinance their mortgages are smoking a whole pipe full of copium.
There are structural reasons to think that inflation is baked in for the next decade, and it would be not at all surprising if a mortgage opened today is paid off before rates again drop below 5%.
> Consider this: From 1978 to 1985 (7 years), the federal funds rate was never below 8%, and from 1969 to 1991 (that's 22 years), it only dropped below 6% during the recoveries from recessions.
That $1T and counting is pumped right back into the economy (M2 currently sits at $21T). CBO projects cumulative fiscal outlays of $20T over the next decade, and that's assuming no other recessions or wars. Not very sustainable at high rates.
It’s a very Silicon Valley specific view. Which makes sense when you consider what lower rates mean for tech valuations. (Or for a laggard VC trying to make their low-double or even single-digit returns look palatable.)
Not how the Fed works. (And given recent deficits, the Congress isn’t worried.)
> Keeping rates high on the government’s debt may increase inflation
Nope. This is Erdoganomics.
The multiplier effect from credit contraction more than outweighs the new money of marginally-higher rates.
> it’s more likely rates will be cut
This has been Silicon Valley’s hot take since rates rose. Like yes, eventually they’ll have to come down. (There isn’t much room for them to go up.) But the Fed is far from constrained.