FOMC how can I explain it? I’ll take it, frame by frame it
If you’re a hip-hop fan and ready to feel old, here’s a great start to your Wednesday: Naughty by Nature’s “O.P.P” is 31 years old. I really miss the 90’s! 80’s kids grew up in a fun time, but man, the 90’s - I loved it.
Alright no more fun. Let’s get down to business. Credit Master Jerome is speaking today and everyone is wondering, will he wear the red tie, the blue tie, or something a little more sinister; a light purple tie? Okay, I’ll get serious now. The market has essentially priced in a rate increase of 75 bps for later today:
With less than a 10% chance for 50, it’s safe to say we know where rates are going because the bond market has been telling us rates need to be at 4%.
As I’m sure those of you who have been reading this stack for awhile know, I did not think the Fed would get rates this high. But they have, and with rates set to go up by another 75 basis points today, the cost of credit will officially be higher than at any point since pre-GFC. And as I’ve mentioned numerous times, higher credit cost means larger interest payments for the federal government when it refinances it’s debt outstanding.
And roughly a third of the $30+ trillion in debt is shorter duration. This is going to balloon interest payments as a percentage of government spending very quickly. The Fed will pivot. Sure as you’re born, they will lower rates again much sooner than many people think. I still believe that. In the meantime, what does all of this mean for equities?
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