Higher Rates for Longer? No, Higher Rates For…ever

April 18, 2024

By Robert Wiedemer

All the talk about rate cuts is kind of silly.  The economy is doing fine due to massive Congressional borrowing.  Inflation is not going lower.  It’s very unlikely to go back to 2% as the Fed would like to see.  More likely it will bottom out at around 3.5%.

So, why would the Fed want to lower rates significantly?  They won’t.

Over the Next 18 Months We See the 10 Year Rate Going to 5.5%

In fact, longer term, over the next 18 months, we see rates going higher.  Quite likely to 5.5% on the 10-year bond, up from 4.6% today.  The rate will go up, not because the Fed wants it to, but because Congress will keep borrowing at a ferocious rate of nearly $2.5 trillion annually. 

That level of borrowing will force interest rates up.  It’s just supply and demand.  A massive increase in demand for money by Congress will push up the price for borrowing money until it hits 5.5%.  That’s probably as high as the economy can handle without encountering real problems. 

So, what happens when the economy (and the banking system) hits real problems? The Fed will roll the presses!  It will print enough money to keep rates from going higher.  It’s pretty much that simple.  And the Fed can keep rates from going over 5.5% until all their money printing creates enough inflation to FORCE interest rates higher.  But that will likely take quite a while.

This Is Not a Simple Rate Raising Cycle; It’s a One-Time Rate Increase

In the shorter term, what we’ve seen in the last couple years is not a rate raising cycle where the Fed raises rates to stomp out inflation and then decreases rates to bring the economy back. That’s how so many investors describe it and want to see it. 

Instead, it is a one time rate increase from the ridiculous and unsustainable rates post-Financial Crisis.  We had rates of 1% or even negative 1% for a 10-year bond.  That’s nuts and was doomed to fail.  As for bringing the economy back from the shock of higher rates, Congress has taken care of that with its massive stimulative borrowing.  With so much stimulus there is no need to lower rates. 

However, investors like to see financial movements as cycles because that is much more comfortable than a one time shift. That’s why you see so much talk about a rate raising cycle.   A cycle is something investors have seen before and can predict.  One-time shifts are not as predictable and are somewhat terrifying to the investment community.

That’s partly for good reason.   A one-time shift in one part of the financial markets may mean there are one time shifts in other parts of the financial markets.  In the case of higher interest rates forever, it’s very true:  A one-time increase in interest rates means a one-time devastating blow to bonds and real estate. 

I have discussed this issue before and will discuss it again as it becomes increasingly clear that both real estate and bonds are in for a beating – a big bad beating that nobody wants to talk about. 

To wrap it up, the Fed has already indicated in the last few months that it will start moving back towards printing money by reducing bond sales in April.  So far, they haven’t done so.  And, until they do, expect upward pressure on interest rates and downward pressure on the stock market.

 We are following the Fed’s money printing operations closely since rising 10 year interest rates are the single most important factor affecting stock values, if not the only factor.   We know the Fed will reduce bond sales and move towards buying bonds (money printing), it’s simply a matter of time. And, when it does, that will make the stock market happy again.

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