The Fed Is Easing The U.S. Debt Burden and Bailing Out BofA
The chart at the bottom of this article plots Core CPI (All goods and services less food and energy). Core CPI is the Fed’s preferred inflation measure (so it says). Core CPI was at 3.6% back in April and is at 3.3% as of the most recent data, which is for the month of August. You may ask yourself: why is the Fed lowering rates now? Our view is that the Fed lowered its Fed Funds rate by 50 basis points yesterday - that is to say one half of one percent - to reduce the United States’ interest expense burden and to save the four large banks from having to absorb significant unrealized losses - especially Bank of America.
Why Now?
Core CPI is not so different over the April 2024 - August 2024 period. So why did the Fed lower rates now?
For one, the United States has $35.4 Trillion in debt outstanding as of yesterday. That is an enormous figure by any standard. 17% of the $35 Trillion ($6 Trillion), is in T-Bills. By lowering the Fed Funds rate, the Fed can ease the Interest Expense burden on the T-Bill portion of the Federal Debt (the Fed has less control over long rates, unless it engages in a QE program where it would purchase Treasury bonds with 7, 10 and 20 year maturities. This action would lower yields on those Treasuries.
It is interesting that the 10-year Treasury yield has increased from 3.61% on September 17th to 3.72% as of 2:24am ET on September 19th. I would not be shocked to see the 10-year Treasury yield climb as the Fed lowers the short end of the yield curve. Treasury investors are not assigning sufficient risk to long bonds given the United States’ suffocating debt position, which is only likely to get worse under a Trump or Harris Presidency (I see both candidates running irresponsible fiscal policy over the next 4 years).
If the 10-year Treasury yield gets back above 4%, I expect that the Fed will lower its Fed Funds rate more aggressively and we could see a zero percent Fed Funds rate by Q1 2025.
Second, by lowering its Fed Funds rate, the Fed is saving the big 4 banks - Bank of America in particular - from having to recognize hundreds of billions of Dollars in unrealized losses on Treasury and Mortgage-backed investment holdings. Recall that BofA gorged on Treasuries and Mortgage-backed securities when Fed Funds was at or near zero, thinking rates would never climb. BofA thought wrong. The Fed’s Bank of America bail out started yesterday.
