The Fed Is Screwed

|January 15, 2022

The Fed is screwed.

Inflation is rip-roaring away – the consumer price index clocked in at a 7% rise for December. That’s the fastest pace since June 1982.

Excluding food and energy, the so-called core CPI was up 5.5% on the year, its highest growth since February 1991.

Food prices were up 6.3% over 12 months, their biggest rise since October 2008.

Thanks to those dastardly numbers, we’re now seeing predictions for four interest rate hikes this year. In fact, those who wager on such things have put the likelihood at 50%, with a 79% chance of a hike in March.

But before anyone thinks we’ll get back to “normal” interest rates… the Fed has a big problem.

It’s about to play a rather wicked game of whack-a-mole.

Because as it tries to fix one problem (inflation), it’s going to make another problem far, far worse…

The interest we owe on our national debt.

Scary Money

Our government pays massive amounts of interest each year on its tremendous debt.

In 2021, the amount was about $300 billion. That’s real money coming out of our federal budget. It’s more money than what we spent on food stamps and Social Security Disability Insurance combined. It’s four times as much as we spent on K-12 education and more than eight times what we spent on science, space-related efforts and technology.

And that interest piece of the spending pie will only get bigger and bigger…

Chart - Net Interest Costs Consuming

The amount we spend on interest could TRIPLE in just 10 years… to nearly $1 trillion.

Chart - Interest Rates Projected to Raise Sharply

Why the drastic – and scary – increase?

Because these estimates are factoring in higher interest rates.

For 2026, the Congressional Budget Office projects that the interest rate on 10-year Treasurys, currently at 1.7%, will be 2.6%. As a result, the interest cost of federal debt will rise to $524 billion. For 2030, the projections are 2.8% and $829 billion, respectively.

From there, it’s just a short hop to the nearly $1 trillion in 2031 that we see in the chart.

Here’s the thing about the Fed’s ultra-low interest rate policy over the last two decades… It has allowed much of the national debt to be rolled over into those low rates. That’s why the interest we owe has remained fairly steady despite reckless spending.

But now, with rates on the rise, any new debt will cost a lot more… and we know the government isn’t about to stop spending money it doesn’t have.

A Big Problem

So the Fed has a problem… a big problem.

It needs to fight inflation with higher rates… but it can’t raise them too much without blowing up our budget… and ticking off our creditors (ahem, China).

Now, this wouldn’t be as much of an issue if we also had growing revenue (GDP) to go along with our more expensive interest payments…

But our economy is in no shape to support higher rates. Before the pandemic, our economy had been growing at an anemic 3% per year over 10 years.

Only the Fed’s free-money party has given us the illusion of growth.

So again… the Fed is screwed.

Rates won’t move that much… inflation will continue to eat up our savings… and that means speculative assets will remain the name of the game. We’ll continue to pound the table for assets like crypto, companies that buy back their own shares and even private equity…

Assets that love cheap money. Because things aren’t ever getting back to “normal.”

Amanda Heckman
Amanda Heckman|Editorial Director

Amanda Heckman is the editorial director of Manward Press. With unrivaled meticulousness, she has spent the past dozen or so years – give or take a few sabbaticals – sharpening Andy’s already razorlike wit. A classically trained musician and a skilled writer in her own right, Amanda takes an artistic approach to the complex world of investing. Her skill has led her to work with numerous bestselling authors, award-winning financial gurus and – lucky for us – the fine folks at Manward Press.