Edmund Simms's avatar
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Rise and shine

The Federal Reserve has raised interest rates by 0.75 percentage points for the second consecutive month. The central bank is raising rates at one of the fastest paces in its modern history.
Rihard Jarc's avatar
Curious what are your thought on where we stop with the rates in this cycle?
Edmund Simms's avatar
@rihardjarc, I don't know. But I think it's likely to be a higher terminal rate than the market expects—futures are pricing a peak rate of 3.5% at year-end—because:
  • Ongoing global supply problems will prevent energy and food price disinflation from happening quickly.
  • The government is still running a surplus, albeit a smaller one than previously, pushing new money into the economy.
  • Unless yields rise further, there is little reason for non-bank investors to buy Treasuries or MBS with negative real yields.
  • While there is anecdotal evidence that the rate rises have slowed new lending, particularly for mortgages, businesses, consumers, and landlords are all still borrowing more. They're yet to start paying down their debts.
For meaningful disinflation to happen, supply constraints need to be fixed, the deficit needs to shrink, quantitative tightening needs to make its way out of the banking sector, and debts need to start being paid down. These factors are all slow-moving. Unlike interest rate traders, I don't see it happening within the next six months.
Rihard Jarc's avatar
@valuabl I wonder if countries around the world will be able to handle higher terminal rates since they gained a lot of debt in the last century. I don't think its in their interest to have a period of higher interest rates as the country default risks suddenly become a problem again.
Edmund Simms's avatar
@rihardjarc The problem, as I see it, is the level of private debt across the rich world. High and rapidly growing levels of private debt weighs on aggregate demand. Interest rate rises make debt maintenance more difficult and can kick off a deleveraging when the debt burden is too big.

This problem isn't material for the public debt of monetarily sovereign countries like America and Britain.

The countries with the highest risk of crisis are:
  • High risk: France, Hong Kong SAR, Korea, Singapore, Sweden, Switzerland
Followed by:
  • Medium-high risk: Australia, Austria, Belgium, Canada, Denmark, Finland, Ireland, Japan, Luxembourg, Netherlands, New Zealand, Norway, Portugal, Spain, Thailand, United Kingdom, United States

Rihard Jarc's avatar
@valuabl I agree private debt could potentially be a big problem. Thx for the overview! :)