by Zain Jaffer
Author’s note: while it may not be usual to read these types of articles here, the impact of interest rates has also affected the amount of liquidity that can also go to nonprofits. It also contributes to unemployment and other areas of concern. Hence interest rates are worth commenting on here.
As news reports have indicated in August 2024, the previous month seasonally adjusted US unemployment rate reached 4.3%. A view of the Bureau of Labor Statistics unemployment rate visually shows an increasing curving upward trend [https://www.bls.gov/charts/employment-situation/civilian-unemployment-rate.htm].
In addition, the BLS also revised downward an earlier March 2024 estimate of non-farm payrolls by 818,000 [https://www.bls.gov/ces/notices/2024/2024-preliminary-benchmark-revision.htm].
The Sahm Rule, named after economist Claudia Sahm, is when the three-month moving average of the US unemployment rate (U3) rises by 0.50 percentage points or more relative to the minimum of the three-month averages from the previous 12 months [https://fred.stlouisfed.org/series/SAHMREALTIME]. This rule has been triggered, so technically the US is in a recession, though Sahm stated it might be a false positive [https://www.businessinsider.com/claudia-sahm-rule-profile-recession-indicator-unemployment-rate-interest-rates-2024-8].
One major contributor is that debt has become so expensive in the US because of high interest rates, due to the US Federal Reserve efforts to arrest inflation that resulted from an excessive injection of cash into the economy during the pandemic through the CARES Act. Debt is needed by many businesses to operate, by people buying items like consumables, durable goods, houses and others. Credit card and bank loan delinquencies are up due to the higher Fed rates [https://fred.stlouisfed.org/categories/32440].
Without debt, many companies cannot operate, manufacture items, and meet payroll. Some of their incoming money are in accounts receivables and not necessarily cash. Debt allows them to operate properly.
Some companies, funds, and institutions have turned to lower debt sources like Japan, which resulted in a carry trade. Over the past few decades in Japan, the interest rates have been below or near zero to jumpstart their economy after the massive real estate crash of the Eighties [https://www.investopedia.com/articles/economics/08/japan-1990s-credit-crunch-liquidity-trap.asp]. So borrowers take advantage of the cheap debt to convert from Yen to USD, then use the converted cash to buy assets like NASDAQ stocks and bonds in the US to take advantage of the spread, or difference in rates [https://foreignpolicy.com/2024/08/08/japan-crash-yen-carry-trade-global-markets/].
Unfortunately, Japan is now seeing what we in the US have been seeing as well – inflation. The Japanese are not used to inflation. Unfortunately the cheap Japanese debt is fueling their inflation, and thus the Bank of Japan moved to raise interest rates slightly from 0-0.1% to 2.5% to make their debt slightly more expensive [https://www.reuters.com/markets/rates-bonds/bank-japan-outline-bond-taper-plan-debate-rate-hike-timing-2024-07-30/]. Note that this is an overnight lending rate, hence coupled with the multiplier effect of people suddenly having to convert USD to Yen which drives Yen value up, it can amount to a large adder to the debt.
This “reverse carry” thus negates the profit spread of holding the US risk assets like stocks and cryptos, hence the markets took a dive in early August 2024 as investors sold riskier stocks to pay back their carry trade debts in Yen. Unfortunately estimates of the carry trade range from a minimum $3T and up, so it is not just going to be fixed immediately [https://markets.businessinsider.com/news/stocks/stock-market-crash-recession-outlook-us-economy-fed-mark-mobius-2024-8]. No one really has a grasp how huge it is.
Realizing that the US Fed does not want to be seen as trying to side politically with one of the parties in the upcoming November 2024 elections, unfortunately it does not seem to have a choice. It needs to lower rates at the soonest possible time, and at the latest during their next September 2024 meeting. Their attempt to lower inflation through the rate hikes is already working, and although it is not yet at their target two percent inflation rate, they may have no choice anymore [https://fred.stlouisfed.org/tags/series?t=inflation].
The Fed already needs to cut rates as soon as they can. Real people, not economic models, are suffering. We are already in a recession, people are losing their jobs, defaulting on credit card and bank loans, and cannot buy houses because mortgages are too expensive.
The appearance of influencing the November 2024 elections is just that, an appearance. No one is questioning the Fed’s integrity. They already need to act to cut US interest rates.
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