Why the Fed Cuts are Causing Interest Rates to RISE Instead

Summary

The Federal Reserve recently cut interest rates for the first time in over a year, yet rates on mortgages, credit cards, and auto loans are rising. This paradox arises because the Fed only controls the federal funds rate, while other rates are influenced by government borrowing and market expectations of inflation. As the government increases borrowing, it drives up long-term interest rates, creating higher costs for consumers. Financial expert Joe Brown warns against accruing credit card debt and advocates for investing in hard assets as a hedge against rising inflation and increasing borrowing costs.

Takeaways

• 📉 The Federal Reserve has cut interest rates for the first time in over a year by half a percent.
• 💰 Despite the Fed's cut, interest rates on mortgages, credit cards, and auto loans are rising.
• 🔍 The Federal Reserve directly controls the federal funds rate but only influences other interest rates.
• 📊 Increased government spending and borrowing contribute to higher interest rates across various debt instruments.
• ⚖️ The rising cost of borrowing impacts consumer expenses, especially for mortgages, which are the largest expenses for many households.
• 🤑 Average credit card interest rates have reached over 21%, making carrying a balance increasingly costly.
• 🚗 Auto loan rates have also hit new highs, with 72-month loans averaging 8.76%.
• 📈 The market anticipates future inflation, leading to increased long-term interest rates despite the Fed's actions.
• 🏦 Lowering short-term rates can facilitate more government borrowing, contributing to inflationary pressures.
• 💡 Individuals should be cautious about rising debt costs and consider managing their finances strategically in a high-inflation environment.

Q & A

Why did the Federal Reserve lower interest rates recently?

The Federal Reserve lowered interest rates for the first time in over a year by half a percent to help make debt payments more affordable and to signal victory against inflation.

What is the federal funds rate?

The federal funds rate is the interest rate that banks earn for holding overnight reserves, which the Federal Reserve directly controls. Changes in this rate often signal shifts in monetary policy.

How does the Federal Reserve influence other interest rates?

While the Federal Reserve controls the federal funds rate, it influences other interest rates, such as mortgage and credit card rates, through its buying and selling of debt in the open market.

What has been the trend in mortgage rates following the Fed's cut?

Despite the Federal Reserve's interest rate cut, mortgage rates have been rising, with 30-year mortgage rates increasing after reaching a low at the end of September.

What are the current trends in credit card interest rates?

Credit card interest rates have reached an all-time high, averaging over 21%. This increase makes it more expensive for consumers to carry a balance, further complicating their financial situations.

Why are long-term government debt interest rates rising?

Long-term government debt interest rates are rising due to market expectations of future inflation, which is influenced by government borrowing and spending habits.

What is the significance of the CPI report mentioned in the transcript?

The Consumer Price Index (CPI) report came out higher than expected, indicating inflationary pressures in the economy, which influences long-term interest rates as investors seek assurance that their purchasing power will be preserved.

How does government borrowing affect interest rates?

Increased government borrowing puts upward pressure on interest rates because as the government sells more debt, it drives prices down, causing yields to rise, which influences overall borrowing costs.

What does the speaker mean by the 'election chaos trade'?

The 'election chaos trade' refers to a specific investment strategy that historically performs well in the months following contentious elections, potentially yielding significant returns based on historical data.

What historical context does the speaker provide regarding government debt and inflation?

The speaker compares the current debt-to-GDP ratio to that of the 1940s, suggesting that the government may use similar strategies of borrowing and low interest rates to manage debt relative to economic growth, leading to rising inflation.