This morning’s consumer price index (CPI) print was a rather higher than expected 4.9%, raising hopes that the Fed will have the ability to stop tightening pretty soon.
But this speculation completely misses the purpose, which is that when the Fed finally does stop raising rates, monetary conditions will proceed to tighten for a very long time. And not only within the US, but in every single place. The world is awash in short-term debt that must be rolled over. With rates of interest now at the very best level in a decade, the whole lot that rolls over going forward will accomplish that at the next rate. Which implies rising interest costs — which is the overall definition of monetary tightening. Governments will see their deficits rise in keeping with their higher interest costs and corporations will see their profits shrink, just as if the Fed was still raising rates.
Consumers, meanwhile, will keep putting their day-to-day lives on plastic. Previously 12 months, US bank card debt has soared to a record high of nearly $1 trillion. This isn’t because an exuberant public is buying exotic vacations and hot cars. It’s because strapped families are working multiple jobs and still not covering basic expenses, and resorting to the fashionable equivalent of loan sharks to feed their kids. And barring an enormous increase in wages, it should proceed, which implies monthly bank card balances charging 20%+ interest will keep rising. That is one other example of monetary tightening.
A recession will unfold this summer and last through the center of 2024, Evercore chairman, Ed Hyman, has said.