Fed’s interest rate decisions has direct impact on the interest rate of bonds, which can directly affect the US government’s ability to borrow money. Right now the US government debt is at all time high, for about $31 trillion. And at the current interest rate, the government would have to pay north of $1 trillion in interest per year. And that’s probably the one quarter worth of tax. Therefore, the conclusion is simple: Fed cannot raise interest rate too much – or the US government defaults and dollar collapses.
Now with the FOMC coming up in a few days, how would you expect Powell to comment on this?
Is he is overly hawkish, that would mean he’s willing to risk the credibility of the US government and the dollar, and the stability of the entire financial system. And that would certainly spook the market. Although this means that dollar rises, it’s going to make debt payment harder.
But if he’s willing to acknowledge the debt limit being a limiting factor in how high interest rates can go, then this usually sends a dovish signal to the market and the market rallies. And that would complicate the inflation fight and make dollar less valuable.
It seems like, more than ever, the Fed is walking extremely tight rope. I suppose it’s fair to say that Fed’s rate decisions in the coming months will have significant impact on the trajectory of the world going forward.
What do you think?
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