Small Pullback in Money Printing = Big Spike in Interest Rates?

By Monday, December 23, 2013

Yield on 10-Year U.S. Treasury Doubles in Less Than Two YearsQuietly, without much fanfare or news, the bellwether 10-year U.S. Treasury hit a yield of 2.9% this past Friday—double what it yielded in June of 2012. (Source: Treasury.gov, last accessed December 20, 2013.)

Yes, the Federal Reserve only slightly pulled back on its money printing program and interest rates are already spiking.

And the standard 30-year mortgage rate hit 4.52% last week, up from 3.35% in November of 2012. Mortgage rates have increased by about a third in one year’s time. (Source: Freddie Mac web site, last accessed December 18, 2013.)

In the statement issued by the Federal Reserve last week, it said, “Beginning in January, the Committee will add to its holdings of agency mortgage-backed securities at a pace of $35 billion per month rather than $40 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $40 billion per month rather than $45 billion per month.” (Source: Press Release, Federal Reserve, December 18, 2013.)

In other words, the Federal Reserve will continue to print $75.0 billion a month in new paper money as opposed to the $85.0 billion a month it used to print. If the Federal Reserve continues to print $75.0 billion a month through the year 2014, its balance sheet will grow by another $900 billion. Yes, by the end of 2014, we will be looking at a Federal Reserve balance sheet that shows close to $5.0 trillion in newly created money on it.

I’d like to end this year’s last editorial issue of Profit Confidential by communicating my most important message of the year.

All this printing of new money (out of thin air) that the Federal Reserve has undertaken since the credit crisis of 2008 hit will come back to haunt us in the form of higher interest rates and inflation. The higher interest rates, as I have outlined above, have already started. While the “official” government figures don’t show it, inflation is a problem too.

As interest rates and inflation rise, the economy will soften. But isn’t the economy soft already, you ask?

Wal-Mart Stores, Inc. (NYSE/WMT) opened two new locations in Washington D.C. The two stores ended up getting 23,000 job applications for the 600 job openings they had. (Source: CNN Money, December 9, 2013.)

I understand these two stores aren’t representative of the entire U.S. jobs market, but we must acknowledge that after $4.0 trillion in newly printed money from the Federal Reserve, which was supposed to jumpstart the economy, we still have an underemployment rate of 13%…and now interest rates and inflation are going to rise?

Further damage to an already soft economy is coming in 2014.

About the Author, Browse Michael Lombardi's Articles

Michael Lombardi founded investor research firm Lombardi Publishing Corporation in 1986. Michael is also the founder and editor-in-chief of the popular daily e-letter, Profit Confidential, where readers get the benefit of Michael’s years of experience with the stock market, real estate, economic forecasting, precious metals, and various businesses. Michael believes in successful stock picking as an important wealth accumulation tool. Michael has authored more than thousands of articles on investment and money management and is the author of several successful... Read Full Bio »

  • robert corbett

    Washington DC is a prosperous city due to big government. Open two Wal-Marts within the Detroit city limits you would probably get 50,000 applications for 600 openings.