What If Fed Rate Hikes Are Actually Sparking US Economic Boom?

[jim584672]

I saw this article on Bloomberg today.

Basically higher rates are helping not hurting the economy due to giving people more interest income. I don't know if I buy into the premise but interesting to ponder a new angle on things.

I get paywalled but maybe someone can read it...

https://www.bloomberg.com/news/arti...conomy-inspires-radical-theory-on-wall-street

 

[Koolau]

I suppose it all depends on how your Asset Allocation is set up. If you have mostly CDs, you might think you're doing well compared to equities - hammered recently because of rates. But keep in mind WHY the rates are still high. Inflation is still high (and the inflation of the past couple of years is already baked in.) So, nothing happens in a vacuum. Given my druthers, I'd go back to ridiculously low CD rates and low inflation all day long but YMMV.


Oh, and remember that you pay taxes on interest.

 

[GenXguy]

I suppose it all depends on how your Asset Allocation is set up. If you have mostly CDs, you might think you're doing well compared to equities - hammered recently because of rates. But keep in mind WHY the rates are still high. Inflation is still high (and the inflation of the past couple of years is already baked in.) So, nothing happens in a vacuum. Given my druthers, I'd go back to ridiculously low CD rates and low inflation all day long but YMMV.


Oh, and remember that you pay taxes on interest.

I was about to say the same thing, my taxes are higher on my interest income, so it's harder to keep up with high inflation. But it also makes my MAGI income higher, so that means less ACA subsidies and higher health care costs for premium, deductible, and maximum out of pocket. I'll take the lower inflation and lower CD rates to match up.

 

[MichaelB]

If the party receiving higher interest is a saver that money isn’t spent and economic activity doesn’t rise. Most investors in interest are savers, so that money gets saved, not spent.

If the party paying the higher interest generates economic activity, like a home builder, the higher rates push out some home buyers, the net is a reduction in economic activity.

When interest rates increase economic always activity slows. After the higher rates work their way through the economy, economic activity can pick up again. That usually takes years. The premise in the Bloomberg article is not correct.

 

[Koolau]

If the party receiving higher interest is a saver that money isn’t spent and economic activity doesn’t rise. Most investors in interest are savers, so that money gets saved, not spent.

If the party paying the higher interest generates economic activity, like a home builder, the higher rates push out some home buyers, the net is a reduction in economic activity.

When interest rates increase economic always activity slows. After the higher rates work their way through the economy, economic activity can pick up again. That usually takes years. The premise in the Bloomberg article is not correct.

This is me being shocked.

 

[Chuckanut]

I saw this article on Bloomberg today.

Basically higher rates are helping not hurting the economy due to giving people more interest income. I don't know if I buy into the premise but interesting to ponder a new angle on things.

I get paywalled but maybe someone can read it...

https://www.bloomberg.com/news/arti...conomy-inspires-radical-theory-on-wall-street

IMO, interest rates are not very high or low. They are back in a normal range. At least they are higher than inflation before taxes.

 

[MichaelB]

This is me being shocked.

Yeah, I know what you mean.

Bloomberg has a paywall so I don’t read it much, but my feeling has been it has some very good analysis and reporting, but it also has a fair amount of fluff. The thing about news organizations is they have to produce content 24/7, even when there isn’t any.

To be fair to the author and OP, some additional interest probably does end up in the pockets of spenders and makes it back into the economy. I suspect it isn’t much.

 

[bjorn2bwild]

......I get paywalled but maybe someone can read it...
https://www.bloomberg.com/news/arti...conomy-inspires-radical-theory-on-wall-street

.....Bloomberg has a paywall so I don’t read it much........

Copy the URL and paste into archive buttons to read.
The archived link using archive.is -


https://archive.is/20240416221549/h...conomy-inspires-radical-theory-on-wall-street

And the link to archive buttons -

https://www.archivebuttons.com/

 

[Koolau]

Copy the URL and paste into archive buttons to read.
The archived link using archive.is -


https://archive.is/20240416221549/h...conomy-inspires-radical-theory-on-wall-street

And the link to archive buttons -

https://www.archivebuttons.com/

Thanks for that. Reading the whole article didn't, however, change my mind that higher rates are generally bad for growth though they may well be necessary to tame inflation. As always, YMMV.

 

[pb4uski]

IMO, interest rates are not very high or low. They are back in a normal range. At least they are higher than inflation before taxes.

+1 Short term interest rates are supposed to be higher than the rate of inflation and they are.

 

[Qs Laptop]

If the party receiving higher interest is a saver that money isn’t spent and economic activity doesn’t rise. Most investors in interest are savers, so that money gets saved, not spent.

If the party paying the higher interest generates economic activity, like a home builder, the higher rates push out some home buyers, the net is a reduction in economic activity.

When interest rates increase economic always activity slows. After the higher rates work their way through the economy, economic activity can pick up again. That usually takes years. The premise in the Bloomberg article is not correct.

Exactly right. Also, higher interest rates means higher borrowing costs for businesses which means they are paying more money for interest rather than expanding their business and/or hiring.

 

[USGrant1962]

I saw this article on Bloomberg today.

Basically higher rates are helping not hurting the economy due to giving people more interest income. I don't know if I buy into the premise but interesting to ponder a new angle on things.

...

All of the above, and there is no "giving" involved. As MichaelB said, the interest income comes from other investors/savers or the government (future taxpayers these days) so there is no net benefit to the overall economy. There in no gross domestic product produced by higher interest rates.

 

[jldavid47]

When interest rates increase economic always activity slows. After the higher rates work their way through the economy, economic activity can pick up again. That usually takes years.

Always? Really? The last two years proves this statement false.

 

[MichaelB]

Always? Really? The last two years proves this statement false.

I beg to differ, what I posted is both true and correct. What we’ve seen over the past two years is economic growth where fiscal spending was strong enough to offset or overcome the higher interest rates. There is definitely a slowdown in important interest rate sensitive sectors such as new housing, existing housing and autos. There is also a slowing of the growth rate of nominal GDP.

 

[Closet_Gamer]

I think one reality is that higher rates haven’t slowed down the largest procurer of debt and deployer of cash: the federal government.

When there is no interest rate sensitivity by the actor who accounts for 20%(?) of GDP, the effect of rate moves get blunted.

 

[Midpack]

I think one reality is that higher rates haven’t slowed down the largest procurer of debt and deployer of cash: the federal government.

When there is no interest rate sensitivity by the actor who accounts for 20%(?) of GDP, the effect of rate moves get blunted.

That does seem to be more of a factor than ever before? The Fed has to keep Treasury yields higher to sell more bonds, just supply and demand. Not helping deficits either…

 

[Dawg52]

If the party receiving higher interest is a saver that money isn’t spent and economic activity doesn’t rise. Most investors in interest are savers, so that money gets saved, not spent.

My parents were an example of this. Their nest egg grew greatly in the double digit interest rate days. No stocks. They saved and my mom was very frugal in how she shopped.

 

[target2019]

I saw this article on Bloomberg today.

Basically higher rates are helping not hurting the economy due to giving people more interest income. I don't know if I buy into the premise but interesting to ponder a new angle on things.

I get paywalled but maybe someone can read it...

https://www.bloomberg.com/news/arti...conomy-inspires-radical-theory-on-wall-street

I have mixed thoughts after reading that article. It is heresy for sure, according to replies I'm reading.

Companies and individuals don't fit neatly into dogma, though. Some continue to grow in wealth no matter what obstacles are thrown in the way.

Found this site which shows cash on hand for a company you select. https://www.macrotrends.net/stocks/charts/AAPL/apple/cash-on-hand

In the end I'm thinking it's a chicken-egg thing. Some are able to take advantage of growing interest rates. Most are not.

 

[Montecfo]

Higher rates slow economic activity. Most consumers are net debtors, not net savers.

And just because the economy is still growing nominally (though slowly) does not mean higher rates have not slowed economic activity. In fact if you look at the path of growth since hikes started the direction has been down.

But as stated the impact of rates alone is hard to isolate then we are spending $1.5T more than we take in.

 

[Route246]

Maybe a bit cynical but I view the current "high" interest rates as "money in the bank" for those holding equities (SPY, VTI, etc.) as when rates go down much of that fixed income cash will go back into equities.

I managed to get 5.38% on a 3 month zero coupon in my 3-month ladder on the secondary market. No complaints there.

 

[DJRR]

It is certainly a mitigating factor, maybe amplified by increasing wealth/income disparity, but probably not material. Much like attempts to measure wealth effects or "feelings" about the economy.

My interest income on my emergency fund went from $300 per year to $300 per month. Certainly helped me to navigate inflation but was not a major driver of lifestyle changes.

 

[Closet_Gamer]

That does seem to be more of a factor than ever before? The Fed has to keep Treasury yields higher to sell more bonds, just supply and demand. Not helping deficits either…

Yes. So you have a decent sized jet engine of money being printed, with higher yields provided, which acts as an economic stimulus.

 

[pb4uski]

I think there are both positive and negatives. The positive is that recipients of interest often reinvest the interest and this provides credit or capital for economic growth. The negative is that the cost of doing business is higher which inhibits economic growth.

From Perplexity

Higher interest rates have both positive and negative effects on the economy:

Positive effects of higher interest rates:

• They can help curb high inflation by making borrowing more expensive, reducing consumer and business spending. This can slow down an overheating economy.
• They can benefit savers by increasing yields on savings accounts, CDs, and other deposit products. This encourages more saving.
• They can boost profits for banks and the financial sector, as they can earn more on the loans they provide.

Negative effects of higher interest rates:

• They increase the cost of borrowing for consumers and businesses, making it more expensive to finance big-ticket purchases like homes, cars, and business expansions. This can slow economic growth.
• They increase the government's borrowing costs, leading to higher budget deficits and national debt.
• They can negatively impact corporate profits, as the higher cost of capital makes it more expensive for businesses to expand.
• They can contribute to a potential economic recession if the Federal Reserve raises rates too aggressively to combat inflation.

Overall, higher interest rates are a double-edged sword - they can help control inflation but also risk slowing the economy too much. The Federal Reserve must carefully balance these tradeoffs when deciding on monetary policy. The net impact on the economy depends on the specific circumstances and how the central bank manages the interest rate changes.

 

[jollystomper]

The cost of doing business being higher also impacts unemployment.

While the jobs creation data seems strong, one has to look at the types of jobs being created. vs. the types of jobs being lost.

 

[almost there]

Its greatly helping me, as both my Roth and Trad. IRA's are in CD's.
Just over 4% ave. on all of it.
But "Bloomberg" is all I needed to hear.

Added, I do not consider these as high interest rates.
More average over the past 3000 years in reality. But folks got used to artificially low rates
that carried over for a decade after the "Great recession". And here we are.
My best int. rate on a home loan was 7 1/2%, prior to paying it off.
Above average historically. But only by a point or so.