*And still may not happen to a level of a 10-year Treasury yield significantly beyond 3.0%!
Can U.S. Interest Rates Ever Rise?
Around the country this mornings headlines will read something about how Congress raised the debt limit, increased federal spending (i.e. deficits) and avoided a federal government shutdown!
Whether you think that the federal government being open is a good thing or bad thing is not really the point here.
What is the point is the fact that this agreement that was read by few if any of our nations ‘leaders’ and was accomplished in somewhat of a bipartisan fashion with Republican Mitch McConnell and Democrat Chuck Schumer singing a verse out of Kumbaya. This means that…
In an election year leading-up to the 2018 midterms this budget agreement is likely all about political expediency, Americans need to check their wallets because they are funding the spending increases and, at some point in time, this increase in federal government spending will likely come back to bite ‘We The People’ in the proverbial ass.
The fact of the matter is that higher deficits will typically lead to higher interest rates in an economy that already has treasury debt north of $20 trillion. And this number does NOT take into account the massive levels of ‘other’ obligations owed by the federal government (‘Debt? It’s Good To Be A Country!‘).
Higher Interest Rates And Consumer Debt!
Back in July 2017 I wrote an article titled, ‘Can U.S. Interest Rates Ever Rise?‘. The crux of the argument then had to do with the ability of the consumer to withstand higher rates (10-year treasury at the time stood at 2.25%) as you will read below.
Can The Federal Reserve Ever Really Normalize Interest Rates?
Are current treasury yield levels appropriate, or are they telling us that the ‘strength’ in the economy may not be lasting, that employment may weaken and/or that inflation may be tepid for some time to come?
Perhaps, but could there be another factor at play that may also keep the Fed from tightening to the point that interest rates become historically normalized?
In other words, if ‘normalized’ yields for the 10-years treasury were somewhere between 4% and 6% from 1990 through the financial crisis, can the Fed reasonably ever bring them back to that level?
Or, will the term normalized interest rates come to mean something much different from what Americans have been used to?
After all, if the economy is reported to be doing so well, can’t the average American tolerate an increase from current levels…
In December 2016 the Federal Reserve raised its target for the fed funds rate by .25% to a target of 1.0% – 1.25% and, according to a TransUnion analysis, 63 million Americans holding adjustable-rate consumer debt were affected. These consumers will pay less each month when interest rates decline and pay more as they rise.
This hike that translated into an average increase in payments of $18, ‘created a challenge for 1 million consumers who were delinquent in their mortgage payment by the end of March…
…TransUnion cautioned consumers and lenders, saying while this study showed only 1 million consumers were impacted in the first quarter, it did not examine long-term impacts of a rate hike. For example, many consumers could be dipping into their savings accounts to meet the new obligations, and could eventually exhaust that source of funds.’
So therefore, if a .25% hike and an $18 increase posed a hardship for 1,000,000 consumers, how much more of an increase can consumers tolerate?
Michael Haltman, President
Hallmark Abstract Service
Board Chair, Heroes To Heroes Foundation
Phone: Long Island – (516) 741-4723, Manhattan – (646) 741-6101