This video is a follow on from the previous video I did about Interest rates and Inflation – so an addendum if you like.
In my opinion, both Interest rates and Inflation are going to go higher in the future - a lot, lot higher.
Let’s look at Interest rates first.
There’s been talk about the FED lowering interest rates in recent times – although, truth be told, this has been talked about for at least 18 months in the alternative media and the event has been dubbed “the Powell Pivot”.
When we went into 2024, it was commonly believed that this lowering of rates would be done in March of this year but now, it seems as if this has been pushed out to June.
The question we can ask is … Will he, or won’t he pivot? In answer to this, I would have to say that I don’t really know.
But, let’s, however, for the sake of this discourse, assume that he does. So, the FED lowers the Federal Funds Rate by a relatively small amount, maybe 100 basis points, so 1%. But really, this would only be “the Effective Federal Funds rate” which operates at the short end of the market. Rates at the long end of the market, the yields for the 10, 20 and 30 year US Treasury Bonds, will, I think, rise. And so, maybe for a period of time, there might be a pronounced steepening of the Yield Curve.
My guess is that the FED might pivot and lower Federal Funds Rate in response to some crisis – probably something related to the banks being in trouble with their Bond holdings, or Commercial Real Estate.
I dare say the Banks, amoung others, are keen for this lowering of rates to occur as it will take them out of the danger zone - at least until rates start to rise again, or they if they manage to off-load their toxic Bonds to some suckers.
So, maybe the FED will lower Federal Funds Rate once, maybe even twice, but sometime thereafter, maybe shortly thereafter, I think the Federal Funds Rate will have to rise.
How so? Well, ordinary Interest rates and Bond yields are closely connected. What happens to one, affects the other. They don’t rise or fall in unison, but they’re closely correlated.
Moreover, most interest rates in the Economy are determined by the yields on long term Bonds, especially the 10 year yield. This is considered the benchmark rate. (More on which shortly)
So, basically, whatever the FED does with Interest rates at the short end of the market doesn’t matter all that much when you consider things from a broader perspective. Market forces are ultimately far stronger than the FED and when the market moves the yields up at the long end of the market, the FED will either have to move with it, or be rendered redundant.
The other thing to say in addition to that is that maybe in the past the FED has had an enormous amount of power and has been able to easily exert its influence over Interest rates overall, both at the short end and long end, but we’ve entered new territory - by which I mean investors are increasingly concerned about the policies pursued by the cu
