Jerome Powell and his colleagues endlessly reassert their “higher for longer” plan for interest rates. They aim to weaken economic growth, bringing inflation back to pre-pandemic levels. The Fed has little choice because the government can’t afford the Fed’s higher for longer stance for much longer!
In the past few months, we have written many blog posts and daily commentaries touting bonds, including last week’s article, Our Elevator Pitch for Bonds. The article succinctly boils down our case to “this time won’t be different.” The pandemic-related factors that drove inflation and interest rates higher are one-time in nature. We believe 40-year economic trends will re-exert themselves and push yields much lower.
A reader countered, “Astronomical future government deficits and the debt required to fund them may be the fly in your ointment.”
Our reply: we agree government deficit spending and, therefore, debt will only become more significant. For that very reason, the Fed and government can ill afford to maintain today’s interest rates. Fiscal spending projections only raise our conviction on the value of owning bonds at today’s relatively high yields.
If you disagree with our economic rationale for lower rates, this analysis may persuade you that the Fed and government don’t have any options but lower interest rates.
- Low-interest rates allowed federal outstanding debt to rise much more than tax revenues and GDP without creating problems.
- Higher interest rates threaten the Federal debt scheme.
- Interest expenses will rise by over $200 billion within a year if interest rates stay at current levels.
The Debt Scheme
Since 1970, federal debt outstanding has risen from $370 billion to $31 trillion. Yes, that’s a massive increase, but to be fair, it should be contrasted with economic and tax revenue growth. Sadly, even considering GDP and tax