Criticism of a report in a magazineNational Interest“The US Reserve Bank’s policy of clinging to high interest rates, warning that this may lead to great difficulties for the US economy.
The magazine said in its report that economic realities are changing rapidly for the worse, and that is why it is better for the Federal Reserve to quickly retreat from its current slogan of the necessity of interest rates remaining high for a longer period in order to reduce inflation. If, despite these new realities, the Fed continues its hawkish stance on monetary policy, we should prepare for a sharp economic downturn.
The magazine explained that among the most disturbing new facts is the sudden loss of investor appetite – both at home and abroad – towards long-term US Treasury bonds, and investors are increasingly concerned that the budget deficit is heading towards 8 percent of GDP at a time when the country is approaching… Of full employment.
The magazine added that investors are concerned that given the political dysfunction in Washington, there is little possibility that this budget deficit will be reduced any time soon.
The question investors are asking is: Who will finance the government’s long-term borrowing needs and at what price? This question becomes more poignant over time; The Federal Reserve continues to reduce its balance by $95 billion per month by not renewing maturing Treasury bonds and mortgage-backed securities.
It also becomes poignant at a time when we know that both China and Japan are reducing their holdings of Treasuries.
The net result of this change in investor sentiment is that, in a short period of two months, the yield on the all-important Treasury bonds, against which many other interest rates at home and abroad are measured, rose from less than 4 percent to 4 percent. , reaching about 4.75 percent, or their highest rate in sixteen years.
This rise has already pushed thirty-year mortgage interest rates to nearly 8 percent, making housing unaffordable for the average American family.
It remains to be seen whether the US housing and auto markets can withstand these higher interest rates.
The magazine stated that another major change that the Fed should pay attention to is the cracks that are now appearing in the banking system. At the beginning of the year; We witnessed the second and third largest bank failures in US history when Silicon Valley Bank and First Republic Bank went bankrupt. The failure of these two banks was primarily due to the damage that high interest rates inflicted on their long-term bond and credit portfolios. With long-term interest rates now at higher levels, the banking system is bound to take another heavy hit to its balance sheet as a result of lower bond prices.
The magazine confirmed that it has now become clear that we will see a wave of commercial real estate loan failures next year, and this is the time when real estate developers will have to renew more than $500 billion in loans at significantly higher interest rates at the same time as they suffer from… Unusually high vacancy rates in a post-Covid world. This could be a major blow to regional banks, whose commercial real estate lending exposure is approaching 20 per cent.
The magazine pointed out that when Alan Greenspan was Chairman of the Federal Reserve, he noted that any country could not be considered an island in itself in light of today’s highly integrated global economy. This is why the Fed must pay attention to the rapid deterioration in the global economic outlook; China, the world’s second-largest economy, is now experiencing its slowest economic growth in decades following the bursting of a massive housing and credit market bubble.
Germany, on the other hand, has already experienced three consecutive quarters of negative economic growth while struggling against the combined impact of the Russia-induced energy shock and the Chinese economic slowdown. With the European Central Bank raising interest rates at a time of economic weakness, it should only be a matter of time before the rest of the European economy succumbs to recession.
The magazine concluded the report by emphasizing that when setting interest rate policy, the Fed must look to the future and take into account the major negative shocks at home and abroad that the US economy will have to grapple with. The magazine also emphasizes that it is unfortunate that the Fed The Fed, in clinging to its reactionary, data-driven policy, shows no sign of changing policy course anytime soon. In doing so, the Fed risks exposing us to an economic downturn that is harder than necessary to contain inflation.
2023-10-09 01:30:32
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