Why Interest Rates that Matter to YOU Must Go Up Whatever the Fed Does

Video Transcript:

It’s Dr. Jeff Camarda and I wanted to kind of mix things up. Hopefully you’re enjoying the videos that the Personal Wealth Advisor staff—our senior PWAs, Jen, Lou, and Blake—have been doing for you. I know some of you miss dear brother Jonathan, and hopefully he’ll be in the rotation. Our objective, by the way, is to give you some variety in the video presentation: some high-level technical information, some more digestible, and kind of mix it up. Thanks for giving your PWAs the feedback you have and keep it coming. This is all about what you want and what is good, and we’re tailoring the programming to you as best we can understand. Please be vocal.

I want to talk today about interest rates. So much really rides on interest rates in the US economy. As you know, I have for a long time seen a number of storm clouds on the horizon, some of which we will visit during the video.

A very popular misconception is when the Fed has an interest rate discussion and the meeting minutes are circulated, what they’re really talking about is a very small piece of the total interest rate equation, which you really ought to appreciate because a lot of folks don’t. When they do that, they’re talking about the federal funds rate, which is really short-term interest rates primarily having to do with banks borrowing from each other and borrowing from the Fed. It sets the tone but it doesn’t have as much economic substance for mortgage rates, other debt, and government debt rates like Treasury bonds.

One of the things with mortgage rates, as I record this, is they are still over 7%. Why is that? Because the Fed hasn’t raised the federal funds rate nearly that much, and these are much longer-term. Anyway, I want to demystify this so you have a better understanding and context on why rates are probably poised to go up. The real rates you care about are poised to go up for the long term, which means this is probably a bad time to be invested in bonds and some annuities.

These slides are drawn from the long webinar I did a few months ago, which you should watch, on retirement: “How to Avoid Common Traps to Protect Your Retirement.” This is just a piece that really bears on interest rates.

The first thing is, interest rates are set by the market—basically people buying bonds or lending money and what return they require. That sets the rates that really matter to most of us in terms of investing or borrowing, longer-term than just a few months with federal funds rates or T-bill rates. The Fed doesn’t influence those to the extent you might think with their typical meetings.

There’s something called open market operations, lately referred to as quantitative tightening. Basically, if the Fed wants to reduce long-term rates, they go out and buy long-term bonds. When demand goes up, the price goes up and the interest the bonds pay goes down. They do this by printing money—expanding the balance sheet. By selling bonds, they take cash back in, reducing the money supply. These are longer-term concerns because, as we look at federal debt driven by Social Security and Medicare obligations, any solution inevitably involves more government debt and tax increases. That won’t be enough to fund the system, which will likely bleed for the rest of the century.

I’m not going to dwell too much on these graphs, but this is not breaking news; it’s been coming for decades. The only solutions are borrowing more money and taxing folks like you, the investors with Camarda Wealth, and others watching this. The money comes from affluent families, not corporations. Taxes will go up. Government debt is going through the roof.

Since the Clinton Administration, debt went down for a while in the 1990s, then up at a fast rate. Long-term, looking back to 1900—125 years—you can see that as a percentage of GDP, debt has been rising. World War II was amazingly expensive; debt peaked over 100% of GDP. It went down with economic expansion. During COVID-19, debt spiked again to near World War II levels, and it’s projected to double from here.

The net interest is a big factor. As government debt accumulates, the interest alone increases the debt, creating a snowball effect. In scenario analysis, annual interest on federal debt rises quickly. The conclusion is that government debt is becoming untenable, and interest rates almost certainly will go up. As government debt and Treasury bond supply expand, it becomes more expensive to maintain and harder to borrow money. Interest demanded on that debt rises.

The long-term prediction I’m making here, and one I hope you keep close, is that regardless of the Fed meetings this year or next, the federal funds rate is only a small part of the overall interest rate picture. The big picture is driven by government debt, borrow-and-spend policies, and lack of appetite to reduce debt. Far from rates going down, rates for car loans, mortgages, and bonds are likely to rise to more historically normal levels—around 7–8% for the long term. Federal funds rates are very short-term; 10, 20, 30-year rates are completely different. If you are waiting for rates to drop to make investment decisions, you might want to reconsider.

Hopefully this was helpful. Thank you for watching. Until next time, this is Jeff Camarda signing off. Have a great rest of your day and a very profitable and pleasant tomorrow.