Powell sees rates staying high for ‘several years’

The Fed did not raise its key rate. But two other rate hikes are in the works by the end of the year.

Inflation remains too high for the Fed’s liking

As expected, the Fed is keeping its key rate in the 5% – 5.25% range. Jerome Powell, however, surprised the markets with hawkish language and a forecast of two additional increases of 0.25% by the end of the year.

This forecast is supported by a strong majority of Fed governors. The median forecast for the end of the year indicates a key rate of 5.60%.

The latest forecasts from the Fed are also counting on higher growth and a lower unemployment rate at the end of the year. Inflation should remain unchanged. Note that the Fed uses personal consumption expenditure (PCE) inflation and not the consumer price index (CPI).

The Fed considers that the resilience of the economy is incompatible with a faster reduction in inflation. In other words, the Fed estimates that it will take further rate hikes to cause a recession capable of bringing down inflation.

Indeed, the “core” CPI has not fallen for seven months, posting an annualized increase of around 5%. “Core” inflation is the change in the prices of goods and services, with the exception of those in the food and energy sectors. It represents inflation that will not subside in the long term.

Interesting statements include that Powell doesn’t see rates falling for many months:

“Not a single governor is anticipating a rate cut this year, nor do I think such a scenario is likely. »

Core inflation “Hasn’t really gone down. It didn’t react much to our rate hikes. We will have to continue to act”he added.

Fed chair says it may have to wait ” a few years “ before seeing rate cuts.

And after ?

Rates will eventually come down, but a lot will depend on geopolitics. A tank is not very productive, on the contrary…

It will also be necessary to expect the return of the printing press. In fact, with a key rate above 5%, the interest paid on the debt increases visibly. As much money as it will be necessary to borrow.

The US government now has to pay nearly $1 trillion in interest every year:

Not to mention our lost ability to grow our energy production (and therefore our real GDP). The peak of world oil production dates from November 2018. Unless there is a surprise, we will now produce less and less black gold. A very bad omen for growth without which the debt becomes impossible to repay.

And since the US government cannot reduce its spending (we have to pay the promised mountains of pensions), it will have to borrow more and more.

Barring an energy miracle – in which yours truly believes moderately – the trajectory of our indebtedness will remain a hyperinflationary headlong rush.

The Fed can deceive a year or two by raising rates in an attempt to bring inflation back to 2%. But this is not tenable:

5% per year on a stock of $32 trillion of debt = $1.6 trillion in interest per year

Knowing that US government revenue for 2023 will only be $4 trillion…

Sooner or later, rates will return to 0% and the Fed will pull out its printing press. Especially since the BRICS no longer want to invest in Treasury bonds…

If inflation persists (probably), then we will find new ways to disguise the numbers. And if that’s not enough, the Fed’s target will drop from 2% to 4%.

Bitcoin will thus go back for a ride…