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Can Few Rate Hikes Reverse the Impact of Trillion Dollars

Almost everyone related to the financial sector is waiting to see how aggressive central banks act in the front of the rate hike and liquidity tightening as almost all major countries' meetings are due this month.

On the top of the list is of course Federal Reserve Bank that is estimated to increase rates by 50 basis points and start asset reduction of $47.5 Bn on 15th June. It is not only the most eager event but the same week around $3.2 trillion notional value of options expires on 17th June.

But really can these few percentage points increases in rates bring down the impact of the trillion dollars that were pushed into the system for almost twenty months. Most likely yes and there is a chance it can even create a large negative impact if aggression is not a controlled one.

To put some perspective on it, a recent report mentioned that an average earner with a 738 credit score and annual income up to $250,000 is living paycheque to paycheque. This is not only scary but an economic time bomb in itself.

The trend of YOLO(You Only Live Once) has made most middle-aged earners into higher spenders with lower savings and highly leveraged. These individuals run balance sheets similar to zombie companies (the company that cannot pay its interest). In this scenario, an interest rate increase from 0.5% to 1.5% within two months will be a 200% increase in their interest obligation.

This will incrementally have one of the two outcomes, either they pay the debt due out of saving or credit card leading to lower or no savings and further debt. The other option and most chronic in times of stress become the default and this would spiral into chaos. Both of these outcomes will lead to consumer-driven inflation lower in near future but not the energy and food inflation that will accelerate in September this year.


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