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Potential Impact of Fed's Rate Hike Experiment: Expert's Caution on Unintended Consequences
As Federal Reserve Chairman Jerome Powell prepares to announce the central bank’s next rate move, one Fed watchdog and financial expert warned of "the final consequences" coming for U.S. markets.
"The tension is between the expectation of a resumption in the stock market, a bull market on the one hand, and on the other, the structure of things that were brought about by a dozen or so years of artificially low interest rates," Grant’s Interest Rate Observer founder and editor Jim Grant said on "Mornings with Maria" Wednesday.
"Throughout the economy in odd spots," he continued, "there are already surfacing adverse consequences of this really long, and I think ill-advised, experiment in rate suppression."
The Federal Reserve is widely expected to deliver another interest rate hike on Wednesday, resuming its campaign to jack up borrowing costs and crush inflation after a brief pause in June.
The projected quarter-percentage point hike would set the federal funds rate between 5.25% to 5.5%, further restricting economic activity as the borrowing costs for homes, cars and other items march higher.
It would mark the highest rate since 2001 and the 11th increase in nearly a year and a half.
Grant explained how he advises clients when markets buoy in hopes the central bank will end the rate hikes, but the Fed remains focused on tightening the economy.
"The Fed is out to do damage now having helped to institute, if not to have instituted this inflation," Grant said. "It's like a maniacal motorist, that runs over you with inflation, stops, looks in the rearview mirror, notices that you are still on the street twitching and then throws it in reverse and gets you again."
"So that's the part of the cycle we're in now," the expert added. "The Fed is ratcheting up rates in the hopes of creating some level of difficulty in the economy."
He further reminded investors of the "lag" impact yet to be seen on U.S. markets since the central bank began its aggressive rate hike campaign.
Analyzing venture capital, Grant noted "there are a huge number of these so-called unicorns waiting in queue to go public. In the meantime, based upon the most recent funding round, the free market value is much lower than the value attributed to the latest funding round."
"And they will be looking at illiquid positions and perhaps of deep unrecognized losses," he warned. "But interest rates are the most consequential prices in a market economy, and they have been distorted beyond recognition. Ergo, there will be unintended but adverse consequences."
While Grant admitted it'll take some time before the Fed's rate "shock" works its way through the economy, he predicted that inflationary pressures are here to stay.
"We just saw this big new labor settlement that the union was delighted with. So I think the outlook is rather [a] stagflation area, or maybe that's just a nostalgic impulse on my part," the financial expert said. "But I do think that the inflation is rather more deeply set than many are willing to face."
Conclusion: Impact on a Newly Formed Business
The current state of the U.S. markets and the Federal Reserve's stance on interest rate hikes have significant implications for newly formed businesses, especially those structured as Limited Liability Companies (LLCs). As Federal Reserve Chairman Jerome Powell prepares to announce the central bank's next rate move, financial expert Jim Grant warns of the potential "final consequences" that could arise from years of artificially low interest rates.
With the Fed expected to deliver another interest rate hike, borrowing costs for homes, cars, and other items are set to rise. This could pose challenges for new businesses that rely on borrowing to fund their operations and expansion. Higher borrowing costs can limit economic activity, making it more difficult for startups to secure the necessary capital for growth.
Grant's analysis of venture capital highlights another potential challenge for newly formed businesses. The distortion of interest rates has led to inflated values and unrecognized losses in the market. Given the uncertain future of interest rates, investors may be hesitant to fund or participate in initial public offerings (IPOs) of these so-called unicorns, leading to illiquid positions and further financial difficulties for new companies seeking to go public.
Furthermore, the looming inflationary pressures, according to Grant, suggest a stagflation area that could impact newly formed businesses. Inflation erodes purchasing power and increases costs, which can be detrimental to startups trying to establish themselves in the market.
In conclusion, the Federal Reserve's rate hikes and the potential consequences they bring could pose challenges for newly formed businesses, particularly those organized as LLCs. Higher borrowing costs, uncertainties in venture capital funding, and the threat of inflationary pressures all add an additional layer of complexity for these businesses to navigate in an already competitive market environment.
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