Since the end of World War II, the United States has experienced a recession after each and every inversion of its yield curve. Both of these things are going on at the same moment right now.
As a direct consequence of this, the Federal Reserve’s monetary policy position in the United States is becoming progressively retrograde, and interest rates are once again declining for reasons related to fiscal policy.
As a result of this, the outlook for asset prices and the value of the US dollar during the winter half-year following the volatility that occurred in the autumn is interesting.
Extremely Distorted Interest Rates in the United States
The state of emergency that has been declared on the United States government bond market can be summarised by the fact that the interest rates on short-term debt securities are noticeably higher than those on long-maturity securities.
There is also the possibility that critical interest rates, specifically the short-term refinancing rates for commercial banks offered by the Federal Reserve (Fed) in the United States, could be higher than the yields on 10-year government bonds in the United States.
In most cases, creditors expect higher returns on debt securities that have future amortisation dates as a sort of compensation for the maturity risk they assume.
The phenomena of an inverse maturity curve in interest rates are something that only becomes visible in extremely unusual circumstances, such as when market participants anticipate a large economic downturn in response to a change in monetary policy.
A slim majority of market participants in the US anticipate that there will be a fifth interest rate hike this year at the next US interest rate meeting after the summer break on September 21.
This fifth rate hike is expected to be in the amount of a double interest rate move, which is equivalent to 0.5 percentage points instead of the regular one.
The interest rate is a prime interest rate that ranges from 2.75 to 3.0 per cent per annum and is in the range of 0.25 percentage points (275 – 300 basis points). At this time, the range is between 2.25 and 2.5 per cent:
Interest Rates Within the Context of the United States Economy
At the moment, the effective rate of the federal funds rate is 2.33 per cent. The real prime interest rate is still strongly negative at 6.17 per cent, with consumer price inflation at 8.5 per cent;
however, if interest rates were raised again by 0.5 percentage points on September 21, it would already be on US Treasury bonds. would be more than the return.
Ten-year period (as of August 12: 2.84 per cent; Source: US Treasury Department). These would be the very first and very second signs that the Fed’s rate cycle has been considerably delayed.
The yield curve went from its typical steep structure to an inverted structure in a record amount of time compared to the previous year’s structure.
The high-interest rate sensitivity of the US economy as a result of a clear asset price bubble and record levels of debt at all levels is the reason for this rapid reversal, in addition to the late start of the rate hike cycle by the Fed. Another reason for this rapid reversal is the late start of the rate hike cycle by the Fed.
Amid a slowdown in economic activity, policymakers in Washington are now considering hiking interest rates.
This results in dramatically higher financing costs for home equity loans, consumer loans, investments, and other financial transactions, which throws an additional strain on businesses and consumers.
It is common knowledge that a recession will follow a rise in interest rates, either immediately or in the not too distant future.
Because the economy of the United States has been technically in recession since the end of the second quarter of 2022, the two events are currently occurring simultaneously.
The Rise in the Federal Funds Rate and the Stages of a Recession
Therefore, it should not come as a surprise that many market participants, particularly in the stock markets, are already anticipating a change in monetary policy.
This is especially true considering that the pain caused by an increase in interest rates can quickly heal before it wreaks havoc on stocks and real estate.
There are numerous additional compelling arguments in favour of exiting the markets, all of which contributed almost 80 per cent of the total retirement savings and assets held by Americans.
Even before the Federal Reserve’s most recent “big” rate hike, the monthly mortgage payments for American households with an average term of 30 years and a 20 per cent equity share nearly doubled, going from approximately US$1,000 per month to US$1,963 per month.
This increase occurred even though the Fed had just completed its most recent rate hike (Source: Mortgage Bankers Association, as of July 2022).
It is therefore logical that an increasing number of homeowners want or want to get rid of their homes, which are financed on credit as quickly as possible due to the heavy burden caused by high-interest rates. More and more homeowners are financing their homes on credit.
Rising Zisnen offers single-family homes in the United States of America for sale.
In the same vein, the availability of mortgage loans has been on the decline since the United States Federal Reserve on July 1 brought an end to its mortgage-backed securities (MBS) purchase programme.
Mortgage companies are now increasingly dealing with the dangers associated with freshly provided loans, and as a result, they are pulling back on the number of loans they are giving. In addition, as a result of increases in interest rates, borrowers may find that they are unable to afford certain mortgages.
Index of the Availability of Mortgage Credit
As a result of institutions borrowing money from the Fed or from each other in the short term and then lending it for mortgages and other long-term investments, in the long run, the lending business of banks is no longer particularly profitable in terms of margins. In addition to (Maturity Variation). As a result of the divergent interest rate environment present with credit terms, this term margin has almost entirely vanished at this point.
As a consequence of all of these strains placed on the real estate market, it should thus not come as a surprise that the number of sales of previously owned homes is decreasing:
Interest in addition to sales of currently occupied homes The Importance of the United States of America’s Midterm Elections.
If you were to summarise the reason why the Federal Reserve in the United States began raising interest rates too late, given that inflation rates were at 40-year highs, it would be because it came under enormous pressure from the White House in the wake of historically low levels of satisfaction. was due to. Elections for both the presidency and the House of Representatives are taking place right now.
But now, specifically on the date of the mid-term election (mid-term election) on November 8, there is a threat of a new discontent of the electorate: up until now, it was a disappointment because of a government that was almost unable to function and high inflation, so it Very quickly an existential fear can turn, with Biden’s approval rating falling again due to the 2008 real estate crisis.
The current president of the United States, who will take office in January, is continuing to reap the benefits of the mortgage moratorium that has been in place since May and will continue to do so until October.
Additionally, the “climate package” that was just approved by Congress in the United States helps enhance Biden’s approval ratings:
Real Clear Politics Approval of Vice President Biden United States Midterm Election
Although the US$430 billion package is suitable for reducing CO2 emissions, the world’s second-largest climate polluter after China, the package is not an economic stimulus package.
China is the world’s largest climate polluter. Because, first of all, the expenditure was increased over ten years, and second of all, the package should not only be fully counter-financed, but it should also give the United States Treasury an additional tax revenue of approximately US$300 billion.
Even if the second scenario does not play out, the effect of the stimulus still results in an annualised average of US$43 billion or 0.18 per cent of annual economic production.
When compared to the coronavirus outbreaks that occurred in 2020 and 2021, it is so small that it cannot even be seen with a magnifying glass, and therefore offers American customers very little assistance.
In addition, several of the climate change package’s agreed-upon actions will begin to take effect as early as the year 2025.
However, rising interest rates are already operating like an atomic bomb with a limited time fuse for the economy of the United States (private dwellings, enterprises, and the state), which has a total debt of approximately $92 trillion U.S. dollars.
Because of rising asset prices and the heightened sensitivity to changes in interest rates exhibited by all economic entities (natural and legal persons, the state), the current monetary policy being pursued by the Federal Reserve risks culminating in a catastrophe before the end of this calendar year.
At the conference for central bankers being held in Jackson Hole, was there already the first evidence of a trend reversal?
Monetary officials may provide the first verbal clues toward course modification during this year’s gathering of central bankers, which will take place from August 25 to 27 in Jackson Hole, Wyoming.
The sentiment of consumers in the United States, which has already reached crisis levels, demonstrates that the situation is rapidly deteriorating and that the financial burden caused by rising interest rates, together with inflation in consumer prices, is having a significant influence on the market.
The Confidence of American Consumers in August of 2022
If the Federal Reserve stays the course with its interest rate policy, it is impossible to rule out the possibility of systemically significant collapses in the financial system, such as the insolvency of huge real estate financiers.
Over the past two decades, the following has occurred on multiple occasions: a drastic adjustment in monetary policy accompanied by emergency measures of dimensions that were previously imagined to protect debtors.
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This is expected to have the effect of significantly decreasing the value of the US dollar and further expanding the bubble that encompasses everything (crack-up boom).
