I promised myself I was not going to write about interest rate cuts on the day of FOMC meetings. No one can make a living writing about interest rate cuts (or hikes) on a semi-live basis. Well, damn it, I am writing about rate cuts. With a fresh 25 basis point cut after 50 basis points cut in September, the effective Fed Funds rate is now in a range of 4.50% to 4.75%. This is going in the right direction, but…
Expectations for future rate cuts are already becoming less bold. This has implications for stocks, bonds, personal debt, dividends and so on. This also has very negative implications for the incredibly high debt servicing costs the government has to pay on nearly $36 trillion (and growing) accumulated deficit.
The yield on the 10-year Treasury came down 5 basis points this day to 4.38%, which most 30-year mortgages track directionally. This is still up 76 basis points from mid-September when the Fed’s first rate cut was announced.
WHAT THE GOVERNMENT CAN AFFORD
There really should be a general understanding that the U.S. government simply cannot afford interest rates above 3% for much longer. Even at 2.5% on average for all Treasury maturities is expensive to carry each year.
As of November 5, the election day, the total debt to the penny was $35,911,107,598,198.18. That is broken down as $28,582,003,195,921.21 in debt held by the public (Treasury’s direct obligations) and $7,329,104,402,276.97 intragovernmental holdings (agencies and indirect debt issued).
Paying an average of 3% on $35.9 trillion, which is only going to grow for quite some time, is still a whopping $1.077 trillion per year in interest paid by the Treasury. And 2.5% on average is still $897 billion in annual debt servicing costs.
FED LANGUAGE TWEAKS INDICATE “SLOWER”
The problem about THIS rate cut versus the prior (and first) rate cut in this interest cycle is that the two statements differ a tad on the “inflation confidence” phrase here.:
NOVEMBER 7 — Recent indicators suggest that economic activity has continued to expand at a solid pace. Since earlier in the year, labor market conditions have generally eased, and the unemployment rate has moved up but remains low. Inflation has made progress toward the Committee’s 2 percent objective but remains somewhat elevated.
SEPTEMBER 18 — Recent indicators suggest that economic activity has continued to expand at a solid pace. Job gains have slowed, and the unemployment rate has moved up but remains low. Inflation has made further progress toward the Committee’s 2 percent objective but remains somewhat elevated.
NOVEMBER 7 — The Committee judges that the risks to achieving its employment and inflation goals are roughly in balance. The economic outlook is uncertain, and the Committee is attentive to the risks to both sides of its dual mandate.
SEPTEMBER 18 — The Committee has gained greater confidence that inflation is moving sustainably toward 2 percent, and judges that the risks to achieving its employment and inflation goals are roughly in balance.
CARRY COSTS & DEFICIT WILL RISE IN 2025
This admittedly feels like the information presented is close to splitting hairs. The problem is that the public has every bit of reason now in 2024 to feel the angst over the national debt nearing $36 trillion. If we superimpose the likely deficits in 2025, with the new president’s budget not taking effect for another year, the U.S. deficit will be approaching $40 trillion. There will come a point of no return if interest rates cannot go lower.
And in Powell’s conference, the one thing that stood out was his comment that “we’re on a path to a more neutral stance” and “must see where the data lead us.”
CME FEDWATCH TOOL GETS LESS BOLD!
Even since the FOMC’s announced rate cut the odds of the CME FedWatch Tool are leaning a bit more towards less aggressive in the rate cuts from the current 4.5% to 4.75% range from now to the end of 2025 (Dec-2025). The first side is the estimated range of Fed Funds and the second side is the odds:
- 2.50-2.75 … 0.1%
- 2.75-3.00 … 1.0%
- 3.00-3.25 … 5.2%
- 3.25-3.50 … 15.1%
- 3.50-3.75 … 26.5%
- 3.75-4.00 … 28.1%
- 4.00-4.25 … 17.4%
- 4.25-4.50 … 5.7%
- 4.50-4.75 … 0.8%
AND POWELL COMPLICATES IT FURTHER
And to further add more fuel to the fire, Powell’s comments said — “as we approach rates that are plausibly neutral, slower cuts might be appropriate…” And to complicate matters a bit further, Powell said the Federal government’s fiscal policy is on an unsustainable path, bet the level of debt is not…”
