Effects of interest rates on consumers and enterprises
Interest rates are pivotal across the economy.
For everyday people, they influence the returns we get from our bank deposits and money-market accounts. They also affect our payments on mortgages, credit card debt, and car loans.
For businesses and the government, interest rates determine the cost of financing their borrowing — particularly significant borrowing for the government. The federal debt stands at trillion.
Regarding interest rate trends, the Federal Reserve increased rates by 5.25 percentage points from March 2022 to July 2023, resulting in the Fed’s federal funds rate target rising to 5.25% to 5.50% from nearly zero.
The Fed funds rate applies to overnight loans between banks (which borrow from one another to ensure capital stability).
This year, investors have been anticipating rate cuts by the Fed as inflation and economic growth decelerate. This anticipation has driven the 10-year Treasury yield down to 4.18% on Monday from 4.71% on April 25.
Futures for Fed actions suggest a complete certainty of rate reductions by September. The likelihood of a rate cut at this week’s Fed meeting is a mere 5.2%.
Futures indicate a 97.6% chance of at least two rate cuts by December, with a 61.8% probability of three or more reductions.
Accusations of Treasury manipulation and their ramifications
Though the Fed sets rates directly, the U.S. Treasury can sway their levels through the timing and quantity of its bond auctions and the types of bonds it sells during these auctions.
Some Republican lawmakers perceive a conspiracy in the way the Treasury has recently managed auctions, a plot to maintain low long-term rates and thereby boost the economy.
They charge the Treasury with keeping short-term rates elevated to benefit consumers financially.
Renowned economist Nouriel Roubini (often referred to as Dr. Doom due to his pessimistic economic predictions) and Stephen Miran, a Treasury official from the Trump administration, have now alleged that the Treasury has improperly manipulated debt auctions in a recent article published by investment firm Hudson Bay Capital, where both hold roles.
“Through modulating the maturity profile of its debt issuance, the Treasury is actively managing financial conditions and, consequently, the economy,” they asserted.
This action is “usurping essential roles of the Federal Reserve,” they claimed. “We refer to this innovative approach as activist Treasury issuance (ATI). By altering the quantity of interest rate risk held by investors, ATI functions through the same mechanisms as the Fed’s quantitative easing initiatives.”
Quantitative easing occurs when the Fed purchases Treasuries to enhance money supply and invigorate the economy.
