Does anyone still think that the US Fed will pivot away from raising interest rates? I am guessing that quite a few people believe – or maybe they are praying – that J Powell and his band of merry rate-setters at the US Fed will cut the global economy some slack.
Just take a look at mortgage rates in America. They have more than doubled from 3% at the start of the year to a 20-year high of 6.9%. Doesn’t the Fed realise just how much pain it is inflicting on US households?
To make matters worse, the cost of food in America increased 11.4% in August from the same month a year ago. How are US consumers supposed to make ends meet when household bills are rising at the rate of knots?
And it’s not just America that is being affected. We are all being impacted by the Fed’s monetary tightening. Does the Fed even care about what it is doing to people’s lives around the world?
Problem is even if the Fed does care, it has no choice. It must raise interest rates to bring down inflation because that is the only way it knows how to. And whilst the Fed is sorting out its domestic problems, it is inflicting distress on the rest of the world.
The path that the Fed is taking will not only cause pain, but it might also cause some things to break. Problem is we just don’t know where the weak links are. Who would have thought that the UK pension industry was so highly leveraged that a spike in Gilt yields could bring it to the point of disintegration?
Point is, the Fed will continue to raise interest rates until there are not only tangible signs that inflation is coming down but that it will stay subdued. It will be mindful that Australia stopped aggressive rate hikes only to see inflation return with a vengeance. The Fed will not want to make the same mistake.
The upshot is that we need to find out how the weak links in our personal balance sheets might be exposed by ever-climbing interest rates. We also need to find out how persistently high interest rates could affect the stocks we are invested in. As Warren Buffet once warned: “When the tide goes out, we will find out who has been swimming naked”.