Fed Rates Impact More Than Bonds

Fed Rates Impact More Than Bonds

Federal Reserve rate increases have a large ripple throughout the investment world, however it also has consequences for the U.S. Federal budget and deficit. Fortune Magazine estimates that rate increase will add $1 to $2 trillion dollars to the deficit over the next decade. This could be another reason why the Fed will want to carefully consider rate increases.

I don’t believe that the Fed shouldpast fed rate hikes sit at ZIRP forever… The Fed kept a ZIRP policy longer during this recovery. Check out this chart of the last Fed rate hikes.

The Federal Government relays on borrowing to fill the gap of their “lack of income.” Interest on the borrowing is what the Fortune article is referencing. If we take the 2015 Federal Budget you can see it is an estimated $469B.

 

If the Fed raises interest rates 1% over the current Fed Funds rate that will equate to approximately $4.69B in additional interest rate payments. Let’s assume they raise up to 4% range… it’s $18.76 BILLION!

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The Federal Government has been running a budget deficit for what seems like forever. As I posted, 2018-2019 has a significant amount of treasuries maturing as a result of QE… When we see higher rates when that debt seemingly rolls over, we’ll be paying higher costs for supplementing our nations lack of income.




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