Two major Fed officers argued last week in favor of cutting rates. Former New York Fed President Bill Dudley said in a Bloomberg Opinion piece, “I Changed My Mind. The Fed Needs to Cut Rates Now,” saying, “The facts have changed, so I’ve changed my mind. The Fed should cut, preferably at next week’s policymaking (FOMC) meeting.” And the current Chicago Fed President Austan Goolsbee added the latest inflation statistics make him confident the Fed can cut rates now, saying, “You only want to stay this restrictive for as long as you have to and this doesn’t look like an overheating economy to me.” He also argued, as I have been saying, that consumer debts are rising, which also argues for rate cuts sooner rather than later. Unfortunately, the Fed once again did not cut rates, but indicated they might in September.
Here are some of the costs of high interest rates, which the Fed can relieve by cutting rates:
· Median home prices reached $426,900 in June, up 4.1% in the past 12 months. Rising prices plus high mortgage rates tend to limit sales, so existing home sales declined 5.4% in June. There were 1.32 million homes for sale at the end of June, up 23.4% in the past year. Single-family home sales are running at a super-low 617,000 annual pace and the inventory of unsold new homes is up to 476,000, a 9.3-month inventory at today’s sales pace – the largest inventory since 2008
· Interest on credit card debt has doubled in the past two years. The combination of higher rates (21.2% at end-2023 vs. 14.5% in 2021) and higher debt levels ($1.13 trillion at end-2023 vs. $775 billion in 2021) yields $236 billion in annual credit card interest now vs. $112 billion in 2021. That has more than doubled over the past two years. The Philadelphia Fed reported last Thursday that 60-day past due credit card balances rose to 2.6%, up from a low of 1.1% back in 2021. The 30- and 90-day past due amounts are at their highest level since 2012, at 3.56% and 1.89%, respectively.
· Cox Automotive reported that vehicle repossessions are up 23% over last year. High interest rates make for higher monthly payments and also suppress both new and used vehicle sales.
· U.S. federal debt is near $35 trillion. At 5% interest rates, that’s $1.75 trillion per year to service that debt. A reduction of just 1%, to 4%, reduces the U.S. debt service costs by $350 billion.
· Office buildings are emptying out in many cities. At the end of 2023, national vacancies rose to 19.6%, the highest rate since these numbers began to be tracked in 1979. The worst markets are in San Francisco, with a 36% vacancy rate, followed by Denver at 31% and Seattle at 28%.
· Nationwide, rents for houses and apartments rose 30% between 2020 and 2023, according to the Zillow Observed Rent Index. This is causing rising evictions.
· The Wall Street Journal, using data from the Eviction Lab at Princeton University reported eviction filings in six major cities are up 35% or more (vs. pre-2020 norms) in the past year. In Phoenix, landlords filed more than 8,000 eviction notices in January alone, the most ever in the Arizona capital in a single month.
That’s why I keep arguing that the Fed needs to cut rates. High interest rates cause suffering for many people AND contribute to inflation. In three-and-a-half years, this is where the Biden-Harris administration has gotten us. President Joe Biden proclaimed last week that he has “cured the economy.” I hope the Biden-Harris administration will stop playing doctor and are done curing the economy.
Inflation is always caused by government over-spending. Period. What the author lists as proof for a need for Fed interest rates cuts are merely some of the aftereffects of Biden administration increasing the money supply between 2021 and 2022 via disastrous legislation that re-ignited the worst inflation this country has seen in decades. All reducing interest rates at this point, with government spending still at record levels, will accomplish is to re-ignite a second wave of inflation in the housing market and across the general economy as a whole, as the economy picks up speed.
In 2019 before Covid, the federal government budget was $4.5 trillion. Which was already too much. Today long after Covid, the Democrats want to spend $7 trillion for 2025, with subsequent years to go even higher on the ludicrous economic pipedreams put forth by Harris. The national debt has already mushroomed to over $35 trillion at this point, with an almost $2 trillion-dollar annual interest payments required. That is now the largest federal government budget item by far and will continue to move higher if any Democrat sits in the White House in 2025. Think about that a minute. Almost $2 trillion dollars in interest payments alone to fund a runaway federal government spending problem.
The answer is to greatly reduce government spending to drain the excess dollars from the system. Personally, I would love Trump to give Elon Mush a free hand to go through the federal government to trim it the way he scaled down X when he took over. So much of the federal government is just bureaucratic waste and inefficiency that serves no real purpose. Anything else will simply prolong the problem and make it more painful as time passes.
The federal gov’t has needed downsizing for many years (decades even). I was a civil servant for nearly 10 years in the 1960s working on the outer ring of the Pentagon. The first office I worked in was mostly military (putting together briefing books for the Chief of Staff). It was hectic & everyone was busy & hurried.
As I worked my way up the pay scale with promotions, the offices had more civilians & less military. The work was less hurried and more coffee breaks & chatting. That’s when the union came in – I was shocked to say the least. What need could there be for a union when for me it was one of the best-paying, most secure jobs I could have? It was no surprise that the people wanting a union were the ones I’d see in the halls chatting it up every time I was hurriedly delivering a document to another office.
Since that time government has grown exponentially, created more depts, hired more people, etc. etc. The reason? To those in power, money does grow on trees; and they think/feel they have unlimited resources to draw from. That includes Congress – why? Because they have no term limits; therefore, they soon learn their 1st & foremost job is to get re-elected, then see how they can get more power & financially enrich themselves. It becomes a lot like the old Chicago mobs.
Well as a secretary with no more promotions unless someone retired or died; I decided to leave gov’t service for a job at a credit union. Best job I ever had as I found out I loved helping people and it became my goal to put a smile on everyone’s face before they left.
Elon Mush offered to head a over sight committee to trim the waste in Government . Well , Trump needs to put him in charge of that job. I also wish President Trump would go through his AGENDA 47 Plan for America each time he does a rally . It’s on his website . 20 great plans he will put into effect as president .
Lower interest rates? No, they should be raising them slightly. Don’t underestimate the devastating potential effects of pent up but so far unrealized inflation already loaded into our economy by reckless congressional and presidential (non)leadership over the past couple decades. Bill clinton did ok under the tutelage of Newt Gingrich but Bush and Obama spent money like drunken sailors on shore leave and congress cheered all the way. Trump did a mediocre job for three years and then went spendthrift in his last year in response to Covid. Then along came Biden who looked at everyone and said “hold my beer” and congress gladly did so – roll out the pork barrels!
So now we have an economy that hasn’t even doubled in true value (excluding popular big city housing) and a money supply that has way more than tripled in twenty years. Inflation? You ain’t seen nothing yet! Until non-real estate prices have doubled (or worse if the government doesn’t stop crazy deficit spending) there is still unrealized inflation loaded into our economy. Alternatively, we could work like crazy to increase the value of our economy but that would mean that some of us would have to come out of retirement and that millennials and gen z would have to diligently work like the greatest generation and the silent generation did. Don’t count on it.
So keep interest rates high, deal with the pain , and siphon some of the pressure out of the bubble before the inevitable burst. In other words, if you find yourself at the bottom of a deep hole stop digging immediately.