We had a pretty sharp upturn in rates in August. Since then, interest rates have remained elevated. It was a bit unexpected because most market analysts were predicting rates to ease a bit in the second half of the year. This was not the way to start out the second half of the year if we expect rates to fall. Of course, the economy being so resilient in the face of rate increases by the Federal Reserve was a surprise as well. A stronger than expected economy has the markets expecting rates to stay higher for a longer period of time.
Another factor contributing to higher rates which is directly attributable to the Fed is the US government borrowing so much money. Pandemic spending and the pandemic recession have contributed to soaring government deficits, which must be financed. Exacerbating the problem is the fact that every time the Fed raises rates, it has become more expensive to finance the deficit. And that higher cost creates more deficits. In 2023, interest on our debt is approaching 15% of total federal spending – or close to three-quarters of a trillion dollars.
Thus, higher rates are not only costing consumers more money, but the government as well. And they are contributing to higher rates in a classic “catch-22.” The Fed is meeting today, and they will decide whether to raise rates yet again. We are quite sure they are aware of the math we just presented. We don’t think this factor will cause the Fed to hold rates steady from here, but many analysts believe that another pause may be justified. Of course, what they say about the future of interest rates is what really will move the markets when they make their announcement tomorrow.