Fed May Raise Interest Rates to 6.5%

Slapping face time and time again, is the Fed going to raise interest rates again?

Recently, US inflation has flared up again, with the CPI in March soaring 3.5% year-on-year, instantly extinguishing the market's expectations for a rate cut.

After this data came out, the tool of the Chicago Mercantile Exchange showed that the probability of the Fed cutting interest rates in June directly "free-falling" from more than 50% to 15%.

What's even more terrifying is that investors have generally begun to worry that, due to an overheating economy, the Fed will turn back to raising interest rates.

UBS analysts even directly issued a warning:

The possibility of the Fed raising interest rates is increasing, and it could be raised to 6.5% by next year at most.

Wasn't it agreed that there would be three rate cuts in 2024, why is it raising interest rates again now? Has the global economic community been fooled by the Fed? Is it really possible for the Fed to raise interest rates to 6.5%?

The false "dawn", the real game

In the past two years, when the Fed will start the interest rate reduction cycle has always been the focus of the market's attention.According to the "voice of experience," investors accustomed to an era of long-term loose monetary policy have repeatedly predicted that the Federal Reserve would "pivot," only to be repeatedly proven wrong, ultimately showing that the Federal Reserve is one step ahead.

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Especially at the end of last year, when U.S. inflation was temporarily curbed, the U.S. debt scale reached a historical high, and more importantly, Federal Reserve Chairman Powell also rarely released dovish signals to the outside world, the entire Wall Street was boiling: in 2024, the Federal Reserve will definitely start a rate-cutting cycle, and the number of rate cuts for the year may reach 4 times, starting as early as March.

However, the facts have proven that this is ultimately just a false "dawn," and the real game is ever-changing. The Federal Reserve's rate cuts are far from as easy as investors imagine.

Especially after the release of the non-farm employment data in March, high-ranking officials of the Federal Reserve have successively released hawkish signals to the outside world. Powell emphasized that "the labor market is strong but is restoring balance," and other high-ranking officials also stated that "there is no rush to cut rates at present."

For a while, the market was doused with a bucket of cold water, and rate cuts once again became a distant prospect.

The most critical issue is that delaying rate cuts may not be the limit of the Federal Reserve.

Although U.S. Bank still predicts that the Federal Reserve will cut rates twice this year, it also issues a warning that the possibility of inflation not being reduced to the Federal Reserve's target is increasing. Both the hot employment data and the stubborn inflation have greatly reduced the possibility of the Federal Reserve cutting rates, and it may even raise rates to 6.5% next year.

Why is it so difficult for the Federal Reserve to cut rates?

The U.S. debt scale is high, and the fiscal deficit issue is becoming more and more severe. Why does the United States continue to delay rate cuts and even raise rates? Why doesn't the United States stop?

There are two main reasons: First, the U.S. economy is booming, and more than two years of aggressive rate hikes seem to have had no impact on the economy.Just a while ago, the latest non-farm employment data from the United States was released, showing a surprising surge of 303,000 non-farm jobs in March, directly "breaking the chart" and setting the largest increase in 10 months, far exceeding market expectations.

How exaggerated is this employment data?

Even President Biden of the United States couldn't help but take credit, stating in a White House announcement:

"Three years ago, I inherited an economy on the brink of collapse... The addition of 303,000 jobs in March marks an important milestone in the recovery of the United States."

The continued enthusiasm in the job market provides important support for the Federal Reserve to delay interest rate cuts and even raise interest rates.

Secondly, not only is the job market hot, but inflation also has a trend of making a comeback.

The CPI rose by 3.2 year-on-year in February, and by 3.5 year-on-year in March, getting further away from the Federal Reserve's 2% target, and it seems to have returned to the upward channel.

It should be noted that the Federal Reserve has repeatedly emphasized to the outside world that the fundamental goal of raising interest rates is to reduce inflation data to 2%.

Now that inflation has reignited, if interest rate cuts are rashly initiated, and inflation soars again, it means that the Federal Reserve's work over the past two years has been in vain.

Therefore, on the one hand, there is the dilemma of inflation, and on the other hand, there is strong economic and job support, the Federal Reserve has lost the reason to cut interest rates in a short time, and once again "played tricks on the world".Raising interest rates to 6.5%, is it possible?

Previously, the market speculated that the Federal Reserve's monetary policy might have a "harvesting intent," and the reluctance to lower interest rates was to prepare to trigger a large enough economy to "regenerate" itself.

However, the Federal Reserve has already struggled to maintain the current interest rate of 5.5%, and it is questionable whether it can really raise interest rates to 6.5%.

Now, the U.S. debt has quickly climbed to 35 trillion dollars, and it continues to soar at an unprecedented rate.

35 trillion dollars, what does this mean?

The interest expenditure alone exceeds trillions of dollars annually, while the fiscal revenue of the United States last year was only 4.4 trillion dollars.

Moreover, last year, several U.S. banks were overwhelmed and forced to close.

If the Federal Reserve continues to raise interest rates to 6.5%, whether the U.S. debt Ponzi scheme can continue and whether U.S. banks can continue to hold on are all unknowns.

In addition, the Federal Reserve has had 13 rounds of interest rate hikes in the past, with the longest lasting up to 69 months, averaging about 23 months.

The Federal Reserve started raising interest rates in March 2022, and it has been 25 months now. Excluding the "longest in history" from 1963 to 1969, the cycle length has already ranked second in history.Of course, the determination of the Federal Reserve to raise interest rates is unknown to the outside world, and from the current internal situation in the United States, it seems to have already found a perfect reason for raising interest rates:

Inflation is making a comeback, and the economic resilience is far beyond imagination. If the United States falls into a stagflation crisis again due to the indecision of monetary policy, then the Federal Reserve will once again become the "sinner of history".

Therefore, the "ghost story" told by UBS may not be impossible to become a reality. The future is unpredictable, and the actions of the Federal Reserve are even more difficult to judge.

In conclusion:

Once the Federal Reserve insists on raising interest rates, it will not only suffer itself but also have a negative impact on the economies of Japan, Europe, Latin America, and the world.

I don't know if the United States has thought about how this big play will end? Faced with a dilemma, the Federal Reserve and Powell need to think carefully.