First of All—Everything that’s happening now can be traced back to Covid. Specifically due to the effects of The Pandemic and, in part, the Russian Invasion of Ukraine, we’ve had never-seen-before Global Supply Chain Shortages of many essential commodities (such as wheat), energy (oil, gas and LNG), various raw materials ranging from steel and aluminum to lumber and fertilizer, the manufacture and assembly of component parts including computer chips going into the production of consumer goods (such as cars and appliances) along with other Increased Costs-of-Doing-Business such as Higher Labor Costs (getting people to come back to work and for Skilled Labor) COUPLED WITH record amounts of Unspent Cash from the Stimulus Checks sent out to The Public and Businesses to “tide everyone over” due to layoffs and shutdowns of Businesses during The Pandemic ALL NOW BEING SPENT leading to a Resultant Compounded “Perfect Storm” Inflation, created by this “perfect wave” combination of all the above occurring ALL at the same time!
To tackle this problem, The Fed raised Interest Rates nine times, 75 basis points four months in a row, taking the Federal Funds Rate from zero (0%) Interest (purposefully set at this level to promote Cash Flow and Emergency Relief needed during The Pandemic) to its current 5%.
Here’s Why—The Raising of Interest Rates Increases the Costs of Borrowing Money (through Higher Loan Rates) thereby Decreasing Demand and Purchases of Consumer Items such as Homes and Cars and for Investors to borrow to purchase Stock and for Businesses–Loans for Start-Ups, Venture Capital, Business Expansion, Equipment, Supplies and Raw Materials.
Also, this increased the attractiveness of investing in Fixed Income Assets such as Treasury Bonds (versus Stocks) which, in turn, also had the effect of Lessening The Total Amount of Money (Supply) in The Private Business-Consumer Sector (a Quantitative Tightening by The Fed to pull Money out of The Private Sector) where, as Economists Agree, we have “too many dollars chasing too few goods” from the record amounts of Unspent Cash being spent from the Stimulus Checks sent out during The Pandemic!
And because Increasing Interest Rates makes purchasing Treasury Bonds more attractive, this will replenish Our Ailing Bond Market we’ve had for the past couple of years since The Onset of The Pandemic because of the historically low interest rates implemented by The Fed (and Other Central Banks Around The World) to improve the Cash Flow needed to help combat the negative effects of The Pandemic and provide emergency relief—these low interest rates, unfortunately, making Treasury Bonds NOT profitable to purchase.
An example of this with the Bank Failures of First Republic, Signature and Silvergate is Silicon Valley Bank (SVB) which was shut down to prevent a “bank run” caused by mismanagement of its deposits by over-investing in Treasury Bonds when Interest Yield Rates were extremely low and now with Interest Rates having risen, the current value of these Treasury Bonds SVB is holding became greatly diminished in value. However, The Government stepped in and gave Banks Par-value (even swap value) for Bonds with Currently Higher Yield Rates.
With these Bank “Runs” and Failures, Banks are keeping more cash on reserve while scaling back loans which makes The Fed’s job easier by NOT having to raise Interest Rates as much to discourage Businesses and Consumers from borrowing.
As a result, The Fed only had to raise interest rates by 25 basis points (1/4%) at its last meeting where before it raised Interest Rates from Zero (0%) during The Pandemic to 4.75%.
Even with this minimum 1/4% increase, Treasury Bonds have become a more lucrative purchase, this helping to replenish the Treasury preventing the recurring Debt Ceiling Crisis we’ve experienced one than once over the past couple of years due to the fact, there wasn’t enough incoming Treasury Funds (via Taxes and previously issued Bonds because of such low interest rates) to cover Governmental Expenses and Obligations becoming due and owing!
As it stands, Treasury Secretary Janet Yellen stated, we don’t have enough money in The Treasury to cover Governmental Expenses and Obligations and, as a result, we will have to borrow from Social Security and Medicare, money that’s already been set aside and earmarked, and if nothing is done, as is currently the case, these funds will run out this Summer!
But–If we have new fresh (Bond) money coming into The Treasury from Additional Bond Sales because of Higher Yields generated by The Higher Interest Rates, we will be able to pay Our Debts coming due, solve Our Recurring Debt Ceiling Crisis, remain Solvent and preserve Our National Credit Rating!!
Otherwise, if we defaulted on our Debts, this would cause Bond Purchasers both domestic and foreign such as China, Japan and European Countries that otherwise routinely purchase Trillions of Dollars in Bonds from us to now Demand a Higher Interest Yield Rate to make further Purchases. This would cost us Hundreds of Billions, even Trillions extra over the years to service the same debt level!!
CONCLUSIONS—As The Fed makes its final basis point (interest rate) increases, Bond Sales are starting to jump! Banks are beginning to buy Bonds!! And The Fed, in the next year, as it finally makes its last hike before bringing down rates, there should be a surge of Long-Term Treasury Bond Purchases locking in these PEAK Rates replenishing Our Treasury and PAYING Our Debts as they become due!!!
