#4 | Interest Rates: How High Will They Go?

Jon “Jag” Gay: Welcome in episode number four, Protecting and Preserving Wealth with Bruce Hosler. I’m Jon Jag Gay joined again by Bruce Hosler of Hosler Wealth Management. Bruce always good to be with you.

Bruce Hosler: Jon, great to see you this morning.

Jon: So in our previous episode, we talked about inflation and it would only be natural that we would follow up that conversation with a chat today about interest rates and the big question, how high are they gonna go?

Bruce: Wow, Jon, that is a scary, scary proposition. You know, this morning you look, and the 30 year mortgage rate is running around 5.32%. It’s May 31st. What a proposition for homeowners and other people considering trying to buy or trying to borrow and figure out how high those interest rates are going to go.

However, we have a couple of indications. The fed has indicated to us that they are going to raise interest rates to try and overcome this inflation that we’re facing. And that is an indication that there’s not a specific number that they have to hit, but rather they’re trying to contain the inflation. So, we don’t know exactly how high they’re gonna go.

Jon: That is a scary thought. It makes me really glad that my wife and I refinanced our mortgage about a year ago when, uh, when the numbers were pretty far down.

Bruce: Did you lock in a fixed rate?

Jon: Uh, yes, we did.

Bruce: Nice, good move.

Jon: That is, uh, something we are definitely thanking our lucky stars that we did for sure. And yeah, it is a scary thing for people about to purchase their home or who have a mortgage or a variable rate or anything like that. So you’re right. It’s not a matter of how high it’s gonna go, but how high are they going to have to go to stave off inflation? So, what can we expect at least the rest of 2022, when it comes to the fed raising interest rates?

Bruce: So, I don’t think they’re looking for a certain interest rate, but rather to begin taming this outta control inflation, but how long will they keep doing it? It’s kind of hard to say. Now the markets are expecting a 50 basis point. Now that folks let me translate that.

Jon: Please.

Bruce: That’s a half a percent. 50, so if you think of basis points as 100 basis points in 1%.

So 50 basis points is half of 1%. They’re gonna increase those by half a percent. In June and a half a percent in July, and then they’ve projected over the next two years. That’s 2022 and 2023.

Jon: Yep.

Bruce: About 11 rate hikes, averaging 25 basis points each. Well, throw that out of the window, cuz they already stepped it up to 50 basis points. They’ve raised it once and now they’re projecting two more. So we don’t know on those, but certainly for 2022. They said to expect six additional rate hikes in 2022. And they’re expecting the fed funds to hit 2% by the end of 2022.

Jon: So we’re talking a quick math every month. We’re talking about, uh, a rate hike.

Bruce: They’re probably hiking almost every month, moving it forward, raising it up. So, as far as seeing the top on this, we don’t know the exact correlation between mortgage interest rates and the fed funds rate, but certainly there’s some coordination between the 10-year. So, as they raise these rates up and the 10-year has to go higher, I think we can expect mortgage interest rates to have to go higher too.

Jon: As you said in the beginning, it’s kind of a scary proposition. So let me ask it this way, Bruce, what goes into the decision for the fed to eventually stop raising interest rates? What has to happen for them to say, okay, we’re good. We can either lower it or stand pat.

Bruce: You know, this is a thing that many of the economists are weighing in on right now, the fed uses a term that says they’re data dependent, and that means that they are trying to signal that they’re not exactly sure exactly what they’re gonna do, except until they get the feedback. And so they’re waiting to see how the market reacts. And this is one of the things that some of the economists are saying is the fed is not gonna be able to continue raising, like they’ve projected they want to. Because the market is going to collapse or, or react in such a way that the fed will not be able to continue on this base, but if they’re wrong and the fed can continue to do this, they’re gonna continue raising rates over the next few years until we hit a recession, which is kind of like that demand destruction we talked about in the last episode.

Where people start changing their exuberance for buying things, and they start pulling back on their purchasing and the economy of the United States is affected by these higher interest rates.

Jon: Let me ask you about the word recession, Bruce, because I feel like you say the word recession and the hair stands up on the back of people’s necks and people cow and fear at the word recession, but is there something good about a recession? If it finally gets this rising inflation under control, can recessions be good?

Bruce: I think that question is hard to answer as far as good. I think there’s some good and some bad that happen in recessions, and it depends on which end of the spectrum you’re on receiving that. But for example, is it good that it caused the stock market to have a breather and it wasn’t going through the atmosphere and through the roof – crazy? Yes, it’s good for that. It causes a breather and lets it reorganize in that. But what’s hard is, as we have these higher interest rates that lead to recession and things slow down, then there’s not as many jobs. Then not as many people are as employed. Businesses are not investing as much. And so that side of it can be hard for some of the population because businesses are not doing as well as they can.

And, you know, most of the people want to avoid that. Now the definition of recession is that it’s just, we have two quarters of negative GDP. So gross domestic product is lower for those two quarters. Then that’s the definition. Now that may not be a very deep recession, nor may it be very long, but that depends on what the government does on how they continue raising these interest rates on how far they may push us and, and the markets may react and cause them to have to stop prematurely. I don’t know about that.

Jon: Okay. So we’ve talked about how higher interest rates are gonna affect consumers. We’ve talked about mortgages – 10-year, 30-year, and, and many other pieces the last episode and a half or so.

What about these higher interest rates and how they affect businesses?

Bruce: Well, that’s a great question, Jon. Businesses too, will have to pay higher interest rates. And they’re already doing that. So many business loans are floating rate loans. So a business gets a line of credit and they can borrow to buy equipment or whatever they need to do with those floating rate loans as the interest rates go up, their borrowing costs increase and their payments on those loans have to go up. This is gonna cause them to slow down their growth projections, Because, future investments into their businesses become uncertain.

Jon: Mm-hmm.

Bruce: They’re not sure what the costs are gonna be. And so business owners tend to pull back and to pull in their plans. And this raises the question, will they be able to afford those higher payments on those loans needed for the growth that they seek? And so then projects that were on the board to be moved forward because of lending. And the interest rates that were good are now pulled back off the board. And so growth projected into the future gets pulled back dramatically and they slow just the whole business sector down altogether.

Jon: All right. So a moment ago I asked you about if there’s a silver lining or any good piece of a recession. Let me flip that question around a little bit and ask you, is there any good news that comes with higher interest rates?

Bruce: So there is some good news for that. Certainly it has to be for the people that are savers. Because who’s going to want higher interest rates? People that are saving money, they want to have higher interest rates because they want to get a return on their investments and better returns. You know, I think back to when I was a kid in the late seventies and we had the Carter administration with the higher interest rates, and I remember people borrowing money, 10, 12, 15, 18%. Well, that’s not so good if you’re borrowing, but if you can buy a CD, that’s paying 12%.

Jon: Yeah.

Bruce: And it’s backed by the government, those investors, those savers, they love that. So for those people, they love a higher interest rate and they love a return on their investment.

Jon: What about the national debt? I know we don’t, we’ve said we’re not talk politics in this podcast. We’re certainly not gonna take one side or the other here, but just from a pure numbers perspective, Bruce. How do the higher interest rates affect our national debt?

Bruce: You know, Jag, that is kind of bad news for our country.

Jon: Mm-hmm.

Bruce: We have borrowed so much money. We have 30 trillion in our national debt, and unfortunately the vast majority of that money is refinanced every two years on two year treasuries. And so what happens as the fed funds rates go up, then the two year treasury rates go up and as those notes come due, we have to reissue new notes, except the problem is. Now the US taxpayer has to pay the new higher interest rate to refinance that debt. And so that means there’s gonna have to be more money going out for interest than was previously, and there’s less money left for a national budget.

So it’s bad news for the US when it comes to the national debt burden that the United States has to pay on these higher interest rates. And for that reason, the federal reserve has motivation to not raise the rates too fast or too high. And so they’re in this conundrum, they have inflation and they have to tamp it down with higher interest rates.

But as they raise the interest rates, then they have to raise the national debt. It’s a terrible place that they’re in. It’s a no win scenario.

Jon: This is a really difficult question. I’m gonna ask you, but I’m gonna ask it anyway. I’ve heard a few pundits talk about the possibility of the US defaulting on their debt. Do you see that at all as a possibility?

Bruce: Certainly not in the near term. That’s not really a possibility, but defaulting on the national debt has come up before in conversations where the Congress has to keep voting to raise the national debt. And as long as foreign countries and people believe that we can afford to pay the interest and service the debt then they’ll have confidence in the national US and the dollar being able to be sustained. But as soon as we get to the point where there’s some question, whether we have enough tax revenue to support that and all the other unfunded liabilities, if you will, or government programs that maybe are not fully funded with money sitting aside, Medicare, Social Security, Medicaid, things like that, when that becomes in question – then the national debt becomes an issue that we have to deal with. And so, this is something where they’re kicking the can down the road, but certainly we’re gonna have to face that music at someday in the future, in the United States.

Jon: Important stuff to be aware of and to think of and to consider from, uh, the business perspective, from the individual perspective. And of course from the federal perspective as well, really good stuff today, Bruce, if there’s somebody who wants to come talk to you at Hosler Wealth Management about this big picture stuff, or more specifically about their own financial future and their retirement, what are the best ways for our listeners to find you.

Bruce: Hey, they can reach us at https://hoslerwm.com on our website. They can sign up for a free appointment there. It’s real easy. Hosler, H O S L E R wm.com. Right on there, they can ask for an appointment and our team will get right back to ’em.

Jon: And the phone number’s real quick.

Bruce: (928) 778-7666. We’re in Scottsdale (480) 994-7342.

Jon: Thanks for the time and the insight as always Bruce. We’ll talk again soon.

Bruce: Thanks, Jag.

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