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It's that time of the month again. Yesterday afternoon, we got word of a pause in rate increases from the Federal Reserve (which is not federal and has zero reserves). After ten hikes in a row, rates were held at 5 to 5.25% but included hawkish statements that sent rate hike odds soaring for next month's FOMC meeting. The FED is claiming that holding rates will allow for time to analyze additional data, whatever that means because they knew all along their aggressive rate hikes would cause severe damage to the banking system, mortgage holders and commercial real estate.
We've already seen a few banks go into the dustbin of history. Now, reports are coming in of large hotels and shopping malls being abandoned in large cities such as San Fransisco. This is happening because these companies can't handle the pressure of rising interest rates (and incessant shoplifting).
This isn't over. It can take 6 months to a year (or more) for rate hikes to be felt across the economy, hence the 'lag effect'. We've already felt the impact of the first few rate hikes from Spring and Summer of 2022. What about the rate hikes of last Fall, Winter and this Spring? We still have to deal with those effects yet to come. I suppose that's what the FED meant by pausing to analyze incoming data.
Last week, the Bank of Canada (BoC) increased rates by 25 basis points to 4.5 / 4.75% after they too paused on hiking at their last meeting in May, so don't get too excited about the FED's pause as they will likely resume rate increases in July. The prime lending rate in Canada is now 6.95%, the highest Canadians have seen since 2001.
This morning, word is out the European Central Bank (ECB) has also raised rates on main refinancing options from 3.75% to 4% while deposit and marginal lending facilities rose to 3.5% and 4.25%. Remember that the ECB's rates were negative zero percent from 2013 to 2022, which is absolutely unprecedented and had never occurred before in all of our known history. I remember that just a few short years ago in the Netherlands, one could get a mortgage at negative 0.01%. I wonder how those mortgage holders feel now after 8 rate increases in a row from the ECB. Just like the FED and BoC, the ECB's rate hikes are the most aggressive in its rather brief history.
One pause here, one hike there. One hike there and one pause here. It's clear they're toying with us and a lot of people are getting burned in the process. The sad part is, this isn't over by a long shot. We've felt the first effects and had a good taste of what's next to come. As mortgage holders everywhere renew at a much higher rate, it means less discretionary spending which in turn drives a slowing economy.
While it's great to see a reprieve from the FED, albeit for a whole month, it's time to focus on what we need the most and to focus less on the things we just don't need. Every penny indeed will count in this new environment we are all being thrust into, thanks to the world's supposedly independent central banks, which always seem to act in lock step.
Except for China. They lowered by 10 basis points or 0.1% but don't count on the Chinese economy to lift the rest of the world out of its doldrums. Youth (age 16 to 24) unemployment hit a record high last month to 20.8%, four times higher than the national rate so to me, that doesn't sound like a booming economy. Word is, the Chinese populace are hoarding their cash and not spending.
Hoarding cash seems to be a familiar theme these days. The velocity of money or how many times a dollar bill will exchange hands has literally collapsed in the U.S.A. since its peak of 2.192 in Q3, 1997. While it improved a bit since the low of 1.112 in Q2, 2020, as at the end of Q1, 2023 the velocity of the M2 money supply is only at 1.259 which suggests most people are tapped out and the rest are probably hoarding cash, especially after these multiple bank failures.
While holding some cash is always good, in the long run it could lose value against ever increasing inflation which drives down the purchasing power of your dollars, yen, euros, etc.. Again, this is why I stress to focus on the things you need against what you don't need and to prioritize what's most important to you.
While gold initially went down after the news from the FED, it has since recovered its losses.
Courtesy www. kitco.com
is down more than $1,000 to $24939 at time of writing while crude oil is up almost 3% to $70.26 so expect close to the same or slightly higher prices at the pumps this weekend as a result.
Stay safe. Stay aware. Stay Prudent!
