Economists are suggesting that the era of permanently high interest rates in the United States may be upon us, with markets already factoring in the possibility that rates may not return to the US central bank’s previous targets.
The Kobeissi Letter, a respected macroeconomics outlet, has highlighted the view that, historically, interest rates have dropped when inflation hits 2%. However, it appears that the markets are taking a different stance, with a belief that interest rates are set to remain elevated.
The publication notes that “Markets are pricing that the Fed funds rate will bottom at 4% in 2025 and then start rising again.” This suggests that higher interest rates are becoming the new norm, marking the end of the era of “free money.”
The Federal Reserve paused its rate hikes in July, but this doesn’t automatically imply a future reduction. Currently, US rates stand at a substantial 5.5%, having been raised 11 times since early 2020.
Rising national debts could pressure the Fed to lower rates more rapidly, especially as interest payments on the national debt continue to mount. The US national debt currently stands at a record high of $33.56 trillion, with additional billions being added daily.
Analysts at Goldman Sachs have noted that rising rates could have adverse effects on GDP growth and could pose risks to financial markets, unprofitable companies, and federal deficits. BlackRock has also predicted that interest rates will remain high.
Moody’s Investors Service has expressed concerns about growing refinancing and default risks for US companies due to anticipated high interest rates and tightening financial conditions for borrowers.
Moreover, consumer sentiment appears to be waning in October, with households anticipating higher inflation in the coming year.
Impact on Crypto and the Economy:
High interest rates can negatively affect the average consumer with debts, resulting in higher payments on mortgages, auto loans, credit cards, and bank loans. This reduced disposable income means individuals have less capital available for higher-risk investments, including cryptocurrencies and stocks.
Conversely, high rates can make savings accounts more attractive by offering better returns. This can incentivize people to keep their money in interest-bearing accounts rather than engaging in digital assets or other investments.
Furthermore, sustained high interest rates can slow down economic growth and make the economy more susceptible to recession, especially when combined with other negative factors such as geopolitical tensions.
As these high interest rates have the potential to reshape investment decisions and influence economic dynamics, both the financial and crypto markets are likely to closely monitor the evolving situation.