Rates Reduction from the Federal Reserve is Unprobable in the Near Future
The Federal Reserve's Persistent Hold on Interest Rates: A Long Game of Musical Chairs
In a jaw-dropping twist of events, the Federal Reserve, otherwise known as the Fed, has kept interest rates unchanged for about six months now. This prolonged stalemate has left investors in a state of shock-it's a scenario unparalleled in the last 25 years of my investing experience.
The FOMC, the Fed's policy-making body, decreased rates by 100 basis points in the last few months of 2024 and has been stagnant ever since. This unusual easing policy stands out when viewed against the Fed's past and present trends.
The Fed Funds Rate: A 25-Year Rollercoaster
The Fed's current stance marks a departure from the norm. The presence of ultra-high rates, coupled with the decline in inflation, creates an unusual risk landscape for consumers.
For instance, a 30-year mortgage in the U.S. is now hovering around 7%, hitting a 25-year high. Despite an ongoing decrease in inflation, the Fed has kept interest rates up, causing a ripple effect throughout the economy.
Credit card rates are also at all-time highs, with the average Annual Percentage Rate (APR) surging above 20%. The alarming $1.3 trillion credit card debt outstandings further highlight the strain these high rates are causing on consumers.
Delinquency rates have followed suit, with the U.S credit card delinquency rate spiking to over 3%, more than doubling since the 2021 low of about 1.5%.
The relationship between the Fed's funds rate and credit card APRs is a complex one. In the early 2000s, when the funds rate was at around 6.5%, the average credit card rate was only about 16%. However, in early 2019, the average APR peaked at around 15%, with a stark difference in the funds rate at only about 2.4%. Currently, we're witnessing a massive 17% spread, which seems extraordinary and raises questions about the Fed's rationale.
Banks' Greed and Increased Risk
Banks' motives may extend beyond pure greed. The funds rate is unusually high, pushing up the cost of borrowing in various sectors, making them increasingly cautious about extending loans. The ten-year Treasury is also around 4.4%, which is also high, and should typically be lower in an environment of reduced demand for U.S. debt assets.
The sharp increases in debt across various sectors, including the government, car loans, corporate, and even mortgages, have raised concerns about risk, further justifying the banks' desire to maintain elevated interest rates and protect their portfolio from potential write-offs.
Debt: An Eternal Elephant in the Room
Discussions about debt can go on and on. Currently, the U.S. national debt stands at a whopping $37 trillion, with most of it in the form of 5, 10, and 30-year Treasuries. As Treasury rates surge, servicing the national debt becomes significantly more costly, gobbling up around 20% of all government tax revenues.
The overarching question remains: Where is the Fed when we need them?
Despite stubbornly high inflation readings and recent pops in oil and commodity prices, the Fed's commitment to a cautious policy on interest rate cuts is questionable. On the flip side, the looming economic slowdown casts doubt on the sustainability of the current rate levels, raising concerns about the impact on consumer spending, sentiment, and potentially even triggering a recession in the second half of the year.
Perspectives on the Fed's Decision-Making
The Fed's decision-making process is under intense scrutiny, with widespread debate about whether they are asleep at the wheel or applying unconventional methods to tackle current economic challenges.
The range of opinions on this issue is vast. On one hand, the Fed's cautious stance on interest rate cuts keeps rates elevated, reducing the overall risk in their portfolio. On the other hand, these high rates may contribute to increased delinquencies, defaults, and create a vicious cycle that could potentially impact the broader economy.
The Road Ahead for Fiscal Policy
Despite the Fed's hesitation in cutting rates, the timing and number of rate cuts in the near future remain uncertain. The limited probability of rate cuts in June and July suggests that any changes may not happen before September. However, even for September, there's a 30% likelihood that the Fed may still hesitate, with a base case of two cuts by year-end.
This delayed action has raised concerns about whether the Fed's decision will come too late, as the economy slows, and high interest rates continue to weigh on consumer spending, sentiment, and potentially trigger a recession in the second half of this year or early next year.
The Impact on Stocks
The recent stock market recovery has been nothing short of remarkable, with the S&P 500 soaring by approximately 25% in just two months. However, technically, it appears that the market is overbought, creating a high risk for a near-term pullback of 5%. This could bring the SPX to the crucial 5,700 support range. Nevertheless, the cautious optimism persists, with a continued bullish outlook for the intermediate and long-term.
The interplay between economic factors, the Fed's monetary policy, and financial markets creates a complex, ever-evolving landscape that requires constant vigilance and adaptation. It's essential to stay informed and make strategic decisions to navigate this challenging environment successfully.
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- The high mortgage rates in the U.S., such as the 30-year mortgage currently hovering around 7%, could potentially discourage consumers from investing in real estate, especially when considering that government investments in other sectors might offer more enticing returns under the current economic landscape.
- The Fed's unusual stance on maintaining high interest rates, coupled with the increasing debt across various sectors, such as car loans, corporate loans, and mortgages, may lead to increased risk for banks, prompting them to exercise caution when extending loans, a situation that could potentially impact investing opportunities.
- As the Fed continues to grapple with the decision of interest rate cuts, investors might seek alternative avenues for financial growth, such as the Financial Prophet's All-Weather Portfolio or the Covered Call Dividend Plan, to maximize their returns and navigate the complex and evolving economic landscape.
