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US Interest Rates Soar: Economic Update

Buckle up, everyone[Anger]—today's economic update is sounding the alarm. The financial landscape is shifting rapidly, and we’re headed into turbulent waters. US interest rates are not coming down; in fact, they are climbing sharply, and this has widespread repercussions. Money Printing continue……

What Rising Interest Rates Mean:

• Mortgages Under Pressure: Homeowners will face higher costs as mortgage rates soar.

• Loans Become More Expensive: Both personal and business loans will be repriced upward.

• Market Instability: Investors are losing confidence in US fiscal policy and the Federal Reserve, as evidenced by the volatile markets.

• REIT is in trouble again my friend

The 10-year Treasury yield has spiked to over 4.7%, its highest level since April last year, creating immense strain on the US economy and global markets. This is a serious development, highlighting cracks in the financial system:

• Commercial Real Estate: Higher rates exacerbate existing vulnerabilities.

• Credit Card Debt Crisis: Americans are struggling with skyrocketing interest rates on credit cards, making even basic purchases unaffordable.

Why Are Rates Rising?

The Federal Reserve has acknowledged a lingering problem: inflation remains stubbornly high. Key contributors include:

• Trump’s Proposed Trade Policies: Set to take effect in 2025, these tariffs are expected to drive up prices further, especially in a trade war with China and other G7 nations.

• Immigration Policies and Labor Costs: Policies restricting immigration could increase labor expenses, further fueling inflation.

What the FED Is Signaling:

The Federal Reserve’s recent meeting minutes indicate a grim outlook:

• The likelihood of multiple rate cuts this year is low.

• By the end of 2025, the federal funds rate could still remain above 4%.

This creates significant challenges for the stock market, which thrives on low interest rates and positive catalysts.

Global Impacts:

The ripple effects of rising US rates are profound:

• Global Currency Pressures: Higher US yields are driving a selloff in global currencies.

• Market Sell-Offs Worldwide: Economies around the globe are struggling to adapt to the heightened interest rate environment.

Inflation is now the central force driving monetary policy, and without relief, higher rates may persist, creating ongoing challenges for individuals, businesses, and global markets alike.

US Inflation Crisis Continues: A Grim Outlook

The US Federal Reserve has released updated inflation projections, and the outlook is concerning. Inflation in 2025 is now expected to reach 2.5% for both headline and core inflation, reflecting an upward revision of at least 30 basis points. The Fed is beginning to factor in the economic impacts of policies like Trump's ongoing trade war with the world. Despite Jerome Powell’s desire to lower interest rates quickly, doing so remains challenging.

Consider the potential consequences: if prices at major retailers like Walmart rise by another 10% and interest rates are simultaneously slashed, a new inflation crisis could emerge, further burdening the middle class. Elevated interest rates negatively impact the stock market and economic growth, making business expansion costlier and increasing loan repayment burdens. This, in turn, puts downward pressure on salaries, triggering a domino effect of reduced earnings, lower consumption, and broader economic stagnation.

Major financial institutions are raising alarms. For instance, Standard Chartered predicts that the 10-year Treasury yield could soar to 5% this year, advising clients to start buying at that level. This confidence likely stems from persistent inflation and rising deficit spending. Inflation isn’t the only driver pushing bond yields higher; the fiscal strain of deficit financing adds to the problem.

Since 2019, Trump has emphasized his trade war with China and other nations, declaring, "I am the chosen one... taking on China on trade." His goal to rebuild America’s manufacturing base requires significant financial investment, far beyond what the current budget can accommodate. Achieving this would necessitate trillions in new bonds, further exacerbating the national debt. Investors are growing increasingly wary, pulling back from US debt auctions as the fiscal crisis deepens.

This week alone, the US government plans to issue $120 billion in new debt. The sale of 30-year bonds is expected to yield over 4.9%, the highest rate since 2007, as investors demand greater returns to compensate for the risks associated with holding US debt. Inflation concerns, coupled with fears of escalating trade tensions, are fueling these dynamics. If Trump's tariff policies expand, the inflation crisis and its ripple effects are likely to intensify further.

Risk of a Global Stock Market Collapse

The rapid rise in interest rates poses a severe threat to the stock market, and as investors, we need to recognize this risk. A global competition for capital is underway. While some turn to gold or real estate, the world's two largest markets remain stocks and bonds. When interest rates are low, there’s little incentive to invest in US Treasuries since returns are minimal. However, as rates climb, the dynamics shift dramatically.

Investors can now achieve nearly 5% returns risk-free through US government bonds, making them an attractive alternative to stocks. This shift is already visible: yields on long-term US Treasuries, including 20- and 30-year bonds, are approaching 5%. Over the past five months, the 10-year yield has surged from 3.6% to 4.7%, despite the Federal Reserve reducing rates. The free market has effectively rebelled, demanding higher returns and disregarding rate cuts.

This environment spells trouble for stocks. Higher interest rates divert capital from equities into bonds, and the ongoing sell-off could intensify. Although high asset prices are inevitable over the long term due to inflation, riskier assets like stocks face significant short-term pressure.

US equities are currently the largest financial market, reaching over $64 trillion in size in Q2 last year—surpassing residential real estate and doubling the size of the US Treasury market. As rates rise, there is likely to be a vacuum effect, pulling capital out of stocks and into government bonds. Other investment classes, such as real estate and farmland, are either too small or too illiquid to absorb significant capital shifts, making equities particularly vulnerable when yields spike.

It’s also essential to consider the stock market’s overvaluation. US equities are experiencing unprecedented valuations, fueled in part by a stronger dollar and weaker global currencies. Foreign investors have been pouring money into US stocks, driving prices and valuations even higher. However, as rates continue to rise, this upward momentum could reverse, leading to heightened volatility and a potential global stock market collapse.

U.S. Federal Reserve Squeezing Money Supply

The higher the rise, the harder the potential fall—this principle underscores the risks facing the economy if something cracks. Since the 2020 stimulus, the stock market has been overvalued like never before. Historically, the average price-to-earnings (P/E) ratio over the last decade has hovered between 18 and 19, with anything above that considered overvalued. In 2025, the P/E ratio has surged to around 24. While stocks could climb even higher, possibly reaching a P/E ratio of 28 or more, such growth becomes increasingly questionable with interest rates continuing to rise.

Higher interest rates drain liquidity from the markets, a critical driver of stock market growth. They also strain consumers, potentially impacting company earnings and discouraging further investment. In today’s economic landscape, high interest rates are a double-edged sword—they contract the money supply, reducing its circulation across the economy.

The Federal Reserve is amplifying this contraction. Since 2022, Chair Jerome Powell has been shrinking the Fed’s balance sheet, reducing total asset holdings by over $1 trillion. This involves selling bonds on the open market, which effectively removes liquidity. When banks and investors purchase these bonds, the cash used in the transactions is effectively "deleted," shrinking the overall money supply. This deflationary effect hampers consumer spending and broader economic activity.

Despite these challenges, external indicators suggest resilience in some areas. The latest jobs report reveals U.S. job openings have risen to a six-month high, jumping from 7.4 million to 8.1 million in just two months. This apparent strength in the labor market gives the Federal Reserve room to continue prioritizing inflation control. Consequently, the Fed may keep interest rates elevated for an extended period, with the base case scenario indicating one or no rate cuts in 2025.

In summary, while the U.S. economy shows superficial signs of health, the Federal Reserve's aggressive tightening and rising interest rates are squeezing the money supply, creating a challenging environment for growth and stability.

Conclusion

The stock market could continue climbing, as the end game is inherently inflationary. Over the long term, markets tend to trend upward, but that doesn’t mean we’re immune to a major correction in the short term. If the Federal Reserve keeps interest rates elevated for too long, it could trigger a significant event—a collapse in prices.

In past crises, specific catalysts drove market downturns. In 2000, the dot-com bubble burst because investors ran out of money to sustain overvalued tech stocks. In 2008, the real estate collapse caused a chain reaction that brought stock prices crashing down, requiring nearly five years for a recovery. The pandemic in 2020 was an external shock, leading to a 30% drop in the S&P 500, which prompted unprecedented money printing.

Looking ahead, predicting the next Black Swan event is impossible by its very nature. However, if a market collapse occurs, it’s essential not to panic. The long-term trajectory remains inflationary, and deep crashes often present opportunities. Personally, the bigger the dip, the more I’ll be investing—whether it’s in gold, U.S. stocks, or global equities. Discounted assets are opportunities to build wealth in a volatile market.

Ultimately, the U.S. government and Federal Reserve will likely find themselves cornered. History suggests they will respond by slashing interest rates and possibly resorting to more money printing to stabilize the system.

What’s your outlook? Will high interest rates trigger a market crash in 2025? Will Trump’s trade policies amplify economic pressures?

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