Greenlight Presentation at Sohn Conference 2022
Comment of the Day

June 20 2022

Commentary by Eoin Treacy

Greenlight Presentation at Sohn Conference 2022

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However, the Fed is limited in raising rates. Powell faces a problem that Volker didn’t have. We have $24 trillion of debt held by the public, which is over 6 times in the last 20 years.

Approximately $7 trillion has to be rolled in the next year. Every 1% increase in rates adds $70 billion to the deficit annually. So, raising rates to 4% would be an additional $280 billion, 85 would be $560 billion, and a full Volker 19% would be $1.3 trillion…and that’s just the first year.

Raising short rates will also cause a strain on the Fed’s financials, where assets are of long duration and the funding is at overnight rates $5 trillion of overnight liabilities costs an extra $50 billion per percent increase in interest the Fed will pay on reserves. I will let you figure out the rest of the math for bigger increases.

The fiscal situation has limited the Fed’s flexibility.

Eoin Treacy's view

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The 1.5% increase in the Fed Funds rate so far this year has increased the deficit by $105 billion. Nevertheless, the Dollar has been firm and there has been little concern about the knock-on effects of this on government finances. That is because fiscal tightening is in effect even if it is not being talked about.  

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