A Surprising Theory: Are Fed Rate Hikes Fueling a US Economic Boom?

Good Day,

As the US economy continues its impressive growth, some Wall Street voices are proposing a radical idea: what if the recent string of interest rate hikes is actually boosting the economy rather than hindering it? This idea, while unconventional, is gaining traction among a select group of economists and investors who argue that the economic evidence cannot be ignored.

Traditionally, the belief has been that higher interest rates stifle economic growth. However, a growing number of experts suggest that the rise in benchmark rates has generated significant income for Americans from their bond investments and savings accounts. This newfound cash is being spent, driving up demand and contributing to economic expansion.

The theory is backed by notable figures like David Einhorn, who point out that rising rates have provided households with a substantial income boost, outweighing the negative impact on borrowers. They note that this time, the economic landscape is different, with higher rates contributing to a more balanced and possibly even slightly stimulative environment.

One of the key factors influencing this view is the impact of surging US budget deficits, which have led to higher interest payments on government debt. This translates into increased income for bond investors, further supporting the argument that rising rates are stimulating economic activity.

While the majority of economists and investors still adhere to the traditional belief that higher rates dampen growth, there is acknowledgment that the impact of rising rates may be less severe than in the past. Factors such as locked-in low mortgage rates have shielded many Americans from the full effects of rate hikes.

The ongoing debate about whether the Federal Reserve should cut rates underscores the complexity of the situation. Analysts are divided on the timing and necessity of rate cuts, with some expecting a cut in September while others suggest a longer hold. The upcoming presidential election adds another layer of uncertainty, as political pressures may influence the Fed's decisions.

In conclusion, the debate surrounding the impact of Fed rate hikes on the US economy highlights the nuanced nature of monetary policy and its effects. While traditional wisdom suggests that higher rates could hinder growth, the current economic landscape challenges this notion, leading to a reevaluation of long-standing beliefs among economists and investors alike.

Warm regards,

Alexander

P.S.

DID YOU KNOW? The market is now pricing in September for the first rate cut, with the probability of a June cut at just 14%, according to CME’s FedWatch tool. Let us not forget how late the FED was in their response to rising inflation..... mortgage rates are back up at 7% again. While I sit back and observe all the global financial market volatility, know that some people are making a fortune betting on these markets..... up and down!

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“Some people are lucky enough to be born smart, while others were even smarter and got born lucky.”

— Famous trader Ed Sekoyta

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DID YOU KNOW? Boat parking? The berth rate for yachts mirrors human BIRTH rates.....not enough! This is something that boat owners around the world seek when buying a waterfront home and it can be an invaluable amenity..... of course boats come in all shapes and sizes. Want to know the painful dilemma of the super-rich? Where to park the super-yacht? Yup, finding a dock that accommodates a 200ft long yacht is becoming more difficult around the globe, and yes, there are roughly 500 private yachts now around 200 feet in length or longer.... These boat slips can sell for over $12 million in Antibes.....

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DID YOU KNOW? Data centers accounted for about 2.5% of U.S. electricity in 2022 and are expected to make up more than 20% by 2030. Artificial intelligence is magnifying this demand. (WSJ)