Fed says they will target 1% increase by July.
People on social media are rejoicing saying how bullish this is. Even talking media heads saying markets will rocket.
Someone please explain to me why this is bullish?
It's not bullish, it's completely bearish.
If the Fed is saying they will raise interest rates by 100 basis points, or the equivalent 1% interest rate hike, it will make borrowing money more costly. Granted, I think that 1% is way too low of a percentage to raise interest rates by. It's as if they are trying to place a Band-Aid on an arterial hemorrhage. It just won't cut it. Frankly, no matter how high they raise interest rates, the inflation rate will get nowhere near the 2% it once was. We're at 7.5% and that inflation train has already left the station. It's as if the FED and the US gov't have dug a massive hole and thrown Americans into it and are now say they will extend a rope woven from cotton candy for us to climb out of that ditch.
For those wondering how a rise in interest rates negatively affects the stock market, let me explain. When the Fed increases interest rates, it increases borrowing costs for everyone but especially for the big financial institutions. This then also effects consumers on main street, because their own borrowing costs go up (private loans, mortgages, credit card rates etc.). Realize that if these big financial institutions have to pay more money to borrow cash, they will pass on the cost of doing this to its customers (so the people on the ground level get fucked). If consumers then have to pay higher rates for their overhead home bills, they will then be left with less disposable income, which in turn means they won't have the extra few hundred dollars to throw at the stock market, which also means these same consumers will have less money to throw at your local franchise and mom-and-pop stores, which results in local business taking a financial hit. Again, this is the cascading effect
below.
(Raise rates) --> Financial firms have to pay more to borrow cash --> Firms pass the bill to its customers, they get fucked --> rise in rates also makes consumers pay higher mortgage, credit card and private loan rates, they get fucked again --> The consumer getting fucked both ways means they have less disposable cash to invest in the stock market and even into their local businesses --> The local businesses then start to suffer as well, many of which are listed on the stock market (Apple, Microsoft, McDonalds, Target etc), which further brings the market down.
Again, the major tools the fed has in attempting to lower (CPI) inflation are:
- Rate hikes in March (barrier to "free" money as loans will no longer be dirt cheap to borrow)
- Continued tapering of bond purchasing (less money creation as the Fed will buy less of the US government debt -US treasury bonds-, which means that the US govt won't have new Fed cash to infuse into circulation)
- Steep reduction to Fed balance sheet (The Fed will sell the treasury bonds they hold via reverse repo agreements, which will in turn get more money off circulation and back into Fed)
The bigger problem is that the US government can't afford to pay higher interest rates, so they are caught in between a hard place and a rock. The US national debt is at $30 Trillion dollars, highest in US history. If you increase interest rates, the way needed to properly fight inflation, you risk the US falling into a national debt crisis. Some economists believe that once the spiral produced by a debt-and-interest-rate tug of war begins, it's almost impossible to escape without drastic inflation or fiscal consolidation.
In other words, we are fucked and the blueprint for this ass fucking was set into motion way back when during the 2008 era and then given an exponential push during the beginning of COVID and now the chickens are coming home to roost.
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