Summary
-The Fed left interest rates unchanged in March 2019, but is hinting of a definite rate rise later in the year dependent on data.
-A Fed rate rise adds to the private sector debt interest burden. Strong employment numbers and stronger core inflation numbers point to further Fed rate rises.
-A Fed rate rise adds to Treasury bond interest income and interest on reserves and bank interest income from loans.
-A larger share of GDP goes to bankers' profits and less to household and business with each rate rise.
-An interest rate rise means that a full inversion of the yield curve and subsequent recession move ever closer.
The Federal Reserve held the target range for FFR at 2.25-2.5 percent during its policy meeting of March 2019 and reaffirmed its position to be patient about further policy firming in light of recent global economic and financial developments and muted inflation pressures.
What Happens When The Fed Changes Rates?
Bank Lending Costs
The chart below shows the stock of private debt as a percentage of GDP.
One sees the most current level of private debt-to-GDP is 202.8% for 2017.
The table below shows the impact of the rate hike on bank reserves advanced by the Fed, via the discount window, when a bank makes a loan.
(Source: Author calculations based on Trading Economics GDP measure)
Highlighted in green is the new level.
Every 0.25% rate movement changes the cost of loan funds by $10 billion. The private banks then pass on this rate change to the customer if they can.
An FFR increase is a giant, economy-wide tax on borrowers and lenders. Each time the Fed raises 0.25%, it moves $10 billion from the private sector to the government sector.
Treasury Deposits
Another impact of a rate change is on Treasuries (also known as government debt). If there is a general rate rise, then the yield on Treasuries will also rise as new Treasuries issue at the new higher rate and existing ones trade on secondary markets for lower face values.
The following table shows the generalized impact of the rate rise on the stock of Treasuries.
Highlighted in green is the new treasury target rate.
The table above shows that with each 0.25% rate rise, some $55 billion of new money enters the private sector from the government sector. The positive side of the equation is that more dollars in the economy grow the economy.
Reference: Seeking Alpha
Read more: https://seekingalpha.
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