By Swann Collins, investor, writer and consultant in international affairs – Eurasia Business News, March 19, 2022

View on the Federal Reserve Building, Washington D.C.

On March 16, 2022, amid annual inflation in February hitting 7.9%, never seen since January 1982, the Federal Reserve approved a 0.25 percentage point rate hike, the first increase since December 2018. This brings the federal funds rate now into a range of 0.25%-0.5%.[1] The move will correspond with a hike in the prime rate and immediately send financing costs higher for many forms of consumer borrowing and credit.

By raising its rates, the Fed forces the banks to increase the rates they offer to their customers for the financing of a house, a car or any consumer good.

Fed officials indicated the rate increases will come with slower economic growth this year. The Federal Open Market Committee also projected roughly six more rate hikes in 2022, along with slower growth and higher inflation.

It seems that the massive quantitative easing and the asset purchase program carried out by the Federal Reserve since 2008 have caused out-of-control inflation and that U.S. central bankers now fear the burst of the real estate and stocks bubbles they have created.

This rate hike will slightly reduce the amount of liquidity in the market and will increase financing costs of debts. Therefore, any rate hike by the Federal Reserve increases the burden of the U.S. federal debt. This debt hit $28.2 trillion in 2021, according to the Congressional Budget Office.

 In February 2022, the public debt of the United States was around 30.29 trillion U.S. dollars, around 2.39 trillion more than a year earlier.

That’s an increase of $9 trillion in two years.[1] The problem is that the entire American national debt didn’t hit $7 trillion until 2004. In other words, the U.S. has accumulated more debt in the past two years as it did in its first 228 years.

A public debt of $ 30 trillion is roughly the value of aggregated GDP of China, Japan, France and Germany.

This rate hike of 0.25% will have no impact on U.S. annual inflation.

The Fed has no leeway. Since 2008, it has allowed credit leverage to increase recklessly. Now, American businesses, households and the federal state are too indebted for the central bank to be able to raise rates without stifling growth and causing borrowers to go bankrupt. This 0.25% increase will not be able to curb inflation. Even if at the end of 2022 the key rate will have been raised to 1% or 1.5%, inflation will remain high and paradoxically economic growth will be constrained, due to persistent supply problems and imbalances in the the distribution of wealth.

Since the start of the coronavirus crisis in February-March 2020, the Fed has injected the markets with 120 billion US dollars in liquidity each month, through the purchase of 80 billion treasury bills and 40 billion MBS. To briefly say it, the Fed has printed 120 billion of US dollars each month for more than 18 months. High inflation of 7.9% is a logical consequence.

US President Joe Biden will have to deliver quick results in defense of American purchasing power as midterm Senate elections take place next November. High inflation and a drop in living standards could cause a heavy defeat for the Democratic candidates.

Read also : How to invest in gold

Facing enduring high inflation, U.S. investors and families are seeking hedge to protect their wealth and purchasing power. On March 18 gold prices reached $ 1,941.90per troy ounce and lowered to $ 1,922.90 at closure, 04:59 PM NY Time. Over the past 30 days, the price of the gold troy ounce grew by 2.78%.

The yellow metal has always been a great hedge against inflation because it rises in price when the cost of living standards rises. Gold can store value efficiently, when paper currency loses purchasing power because of inflation.

While growth is under pressure in Western economies, amid supply chains disruptions following the coronavirus pandemics and the war in Ukraine, public debt piling up and the US Fed’s tightening of monetary policy, inflation is likely to remain permanently higher than expected.

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© Copyright 2022 – Swann Collins, investor, writer and consultant in international affairs.

[1] FAY Bill, “Timeline of U.S. Federal Debt Since Independence Day 1776”, October 12, 2021 : https://www.debt.org/faqs/united-states-federal-debt-timeline/ ;

[1] The federal funds rate is the benchmark interest rate banks charge on loans to each other and is used to set borrowing costs on credit cards, automobile loans and mortgages. Eight of the FOMC’s nine voting members supported the decision to hike rates. The sole dissenter was James Bullard, president of Federal Reserve of St. Louis, who preferred a 0.5 percentage point hike.