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It's Been Such a Long Time

It's Been Such a Long Time

May 20, 2024

“Long Time" is a song by the rock band Boston. It was their second single and appeared on their 1976 self-titled debut album, peaking at No. 22 on the US Billboard Hot 100 in March 1977. Rolling Stone described "Long Time" as "a perfect marriage of Led Zeppelin and Yes that plays musical chairs with electric and acoustic sounds. The opening lyrics of the song are as follows:

It's been such a long time
I think I should be goin', yeah
And time doesn't wait for me
It keeps on rollin'


For those of you who have a little more than 7 minutes to spare and would like a musical reminder, a YouTube link to this song is included below. There is no music video from the band.

Boston - Long Time

For anyone who would like to buy a home or a car or finance a major purchase, it has been a long time since the Fed started raising interest rates. In fact, it has been more than two years since the Fed began its interest rate increase campaign. From March 2022 to July 2023, the Fed increased its overnight lending rate 11 times, bringing it from a historic low of 0.08% to the current 5.33%, the highest the Fed Funds rate has been in over 20 years. This was meant to slow the economy and bring inflation, which had soared to its highest levels in 40 years, back down towards the Fed's target level of 2%.

There have been all sorts of intended and unintended consequences to both the economy and consumers due to The Fed raising interest rates to such a high level and then leaving them there for the last ten months. Remember, at their December meeting, the Fed indicated that they would likely begin cutting interest rates this year and projected three rate cuts for calendar year 2024. This was a position they reiterated at their March meeting. Much has changed since that time, and the markets, which optimistically hoped for as many as six rate cuts in January, now believe that the Fed will only cut rates 1 or two times this year and perhaps not at all until 2025.

These higher interest rates are putting a dent in consumer finances, as you will see in our first chart below. We all know that US consumers built up a lot of cash during the COVID-19 pandemic due to stimulus checks and enhanced unemployment benefits. Unlike residents in other parts of the world that saved at least 1/2 of the stimulus monies they received, Americans decided to go on a spending spree. Unfortunately, once that money was used, we didn't stop spending. We just put it on credit cards, which are now charging interest rates of 22% or more on an annual basis.

As you can see above, this has caused the average consumer's monthly interest payment to nearly double in the last three years. While many people have fixed-rate mortgages below 3 1/2% interest, rates on other debt are continuing to stay elevated as the Fed has left interest rates at this level for so long.

This financial stress is causing more and more people to look for a second job to pay their bills. As you will see in our next chart, the number of people working a second job is at the highest level we have seen in at least 30 years.

Higher interest rates are also causing additional stress for the federal government. The national debt has risen dramatically, from $20 trillion in 2017 to $34.7 trillion today. This debt is now also being financed at much higher interest rates. The combination is causing the amount of funds needed to pay the interest on the debt to rise dramatically, as you can see from our next chart.

Source: FRED St Louis

The last time the government paid this much interest on debt, interest rates on government bonds were much higher. With a much higher level of debt and higher interest rates, it looks like we are going back to those levels or higher soon. We are uncertain what this may do to the economy and the bond market.

The one good thing that comes from the Fed keeping interest rates higher for such a long time is that you can now actually earn interest on your excess cash. For many years, clients have come to us and asked where they could get a yield above 1% on their savings. Unfortunately, for a long time, there was no good answer. Today, we still see short-term interest rates on high-quality instruments such as treasury bills and CDs in the neighborhood of 5%. We know when the economy eventually slows or when inflation comes down, these interest rates will also come down.

This has led to record levels of cash being held in money market funds. Historically, when money market fund balances moved significantly higher, it is an indication of fear. You will note in our final chart below that past peaks in money market funds occurred during times such as the bubble and the subprime mortgage crisis. During times of economic volatility and dislocation, people typically pull money out of riskier assets like stocks to deposit them into the relative safety of money markets, even if interest rates are low. However, today, people are piling into these funds to get higher interest rates with less risk. We are uncertain how long this party will last, but people are enjoying it for now.

The Fed has kept interest rates high for a long time, and many people wish that these higher rates would start to come back down so that mortgages and cars become more affordable. High interest rates are a double-edged sword. They reward savers and hurt borrowers. While the Fed has reiterated its intent to lower interest rates in the near future, we are uncertain when that day will come and what the catalyst will be that finally allows them to do so. In the meantime, I wanted to give you a picture of what this means to consumers and the federal government. I hope this is helpful context as we continue “Moving Life Forward.”

© 2024 Jesse Hurst

The views stated are not necessarily the opinion of Cetera and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results.

Neither Cetera Advisors LLC nor any of its representatives may give legal or tax advice. This information is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation.

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