The Fed is meeting to discuss the next steps in monetary policy. The consensus is that they will raise the Target Fed Funds Rate by 0.25%. This will bring the overnight target rate from 5.00%-5.25% to 5.25%-5.50%. The Fed Funds Futures says there is a 99% chance of this happening. Interestingly, there is a 1% chance they do more.
We do not think this will have much of an effect on the overall economy. The financial press has been consistently wrong on this issue as they yap about the historic rise in rates. But rising rates from a rate much below inflation to one about equal to inflation is not restrictive to economic activity. It is simply taking the foot off the gas. We think at 5.5%, short-term rates are at neutral rates and one close to a free market rate. Further hikes from here might be problematic if price inflation continues to come down. The most recent estimate from the Atlanta Fed is that the economy is growing at 2.4%, which is fine.
While the economy is doing ok in the short run, we think it is very sick in the long run. The Fed Gove is running a deficit of $1.5 trillion, growing over time. Significant deficits are a sign of weakness, not strength. Here is an interesting statistic.
The Congressional Budget Office (CBO) projects that interest payments will total $663 billion in fiscal year 2023. This is an increase of 35% from the previous year, the highest level of interest payments since 2012. The increase is due to various factors, including rising interest rates and the growing national debt. The CBO projects that interest payments will continue to rise in the coming years, reaching $1.4 trillion in 2033. This is a significant burden on the federal budget, making it more difficult for the government to fund other priorities.
We suspect the Fed Gov will spend $1.0 trillion in interest in 2024, as 50% of the government’s debt must be refinanced in the next 24 months. The Congressional Budget Office (CBO) has made some projections about the amount of personal income tax the federal government will collect in the coming years. In its 2023 Budget Outlook, the CBO projects that the federal government will collect $2.1 trillion in personal income taxes in 2023 and $2.2 trillion in individual income taxes in 2024. Safe to say, we taxpayers will not be getting much for our tax dollars in the coming years.
We will wait until after the Fed announcement and presser before offering our thoughts and suggestions.
