It looked as if the FED had decided to go all in with money printing. And, it looked like the FED officials were lying through their teeth with all the jawboning since Janet Yellen became FED Chief. Not only was the FED continuing with ZIRP and QE money expansion, but also Negative Interest Rates. But something may have changed the last couple of weeks.
Since a month ago, interest rates have gone up. It’s not enough to call it a spike, but up nonetheless.
Short rates – on 3 month T-Bills – went from a low of -0.04% to a recent high of 0.06%, although they have settled back a little to 0.04%. However, over the rest of the yield curve, from 6 mo and 2 year up to the 10 and 30 year maturities, yields are up by a quarter percent or more.
The odds of the FED actually raising rates “officially” at their December meeting, are starting to look good.
It’s hard to know what may have swayed FED officials. It could have been a brightening of the jobs picture. Friday saw a surprise 100,000+ (62% over the expected number) jump in non-farm payrolls.
Or the FED may have realized that 2016 is a Presidential election year, and the general dissatisfaction with Obama, and Hillary’s campaign blowing up, make it look like this will be a Republican year. The FED wants to avoid being done away with, having their powers reduced greatly, or even merely being audited. Giving some slight appearance of policy sanity might save them.
So what might we expect if the FED in fact does raise rates by perhaps a full percent between December and next summer?
The Dollar, which has been strong versus other world currencies, likely will be buoyed somewhat by a higher rate environment. But, with the strength the Dollar already has shown, and with continuing monstrous balance of payments deficits, the next year could see a slightly stronger to slightly weaker Dollar.
Though the Dollar could move either way, it likely will remain near rcent highs. This will continue to make life difficult both for American exporters and for domestic American companies which face strong competition from imported goods. American multinationals, earning money abroad in foreign currencies and reporting those earnings as Dollars, will continue to show weak earnings. However, those low translated earnings will face easier to beat year earlier results. (Sometimes bad can look good.)
A rising rate environment will mean that some businesses which never would have seemed viable (except for ultra low rates) will look worse than before. Projects, and companies, involved with this massive mal-investment will go belly up. Just as with forest wildfires, things will look awful as the dead wood is set ablaze. Many jobs and much (mal)invested money will be lost.
Higher rates also will begin to eat into earnings even for good companies. Shareholders will see lower earnings, producing lower dividends. The prices for shares with stagnant or falling earnings will drop, further hurting shareholders – and hurting the Tax Man. Budget Deficits will continue and even grow as lower incomes mean lower tax collections.
A continuing US Budget Deficit will mean that those deficits plus maturing Treasuries will need to be financed at a somewhat higher rate. Foreigners will remain disinclined to buy Treasuries, and our government’s War on Savings will restrain American buyers as well. So, once again, the FED will buy most or all Treasuries issued, although at a higher rate.
A higher rate will mean more interest being paid to finance the $18+ Trillion National Debt, so the Budget Deficit will rise. But the Deficit will rise only slowly at first as the lion’s share of Treasuries won’t mature the first year. Trying to deal with the escalating Budget Deficits will expose, for all to see, the idiocy of the Massive overspending of the 21st Century.
All in all, a rising interest rate environment will be painful – as it always has been in years past. But, it is not the rising of rates, off insanely low levels, which are the source of the pain.
The fault lies in the government policies which caused the low rates to be introduced in the first place. It is the application of Socialism – some call it Keynesianism, Mixed Economy, or Crony “Capitalism” – which is the root cause.
A move away from Socialism toward Freer Markets will allow us to enjoy real growth in the future. But, the year or so of clearing away the dead tissue won’t be fun.