They say wanna hike rates to combat inflation but I dun think they can even increase by 0.25 % now. Their debts already 30 trillions and still increasing non stop.
If inflation now is 7% increase rates by 0.25% also cannot do shit. They dun have a Paul Volcker anymore. So I think USA is like all the past empires during their last phrase of power. Inflating debts until it does out of relevance.
The idea for raising rates is not to use the increased interest rate to knock off the inflation rate, that would never work. Rather what they are hoping to do is to accelerate capital inflow by creating a cycle whereby the increased attractiveness of USD denominated assets raises the Dollar index which in turn attracts even more foreign money to come in, especially money that is parked overseas by US entities.
This helps to mitigate the cost escalation of home produced and imported goods due to a stronger exchange rate and ideally the increased capital inflow results in a much more active capital investment environment thus producing a positive effect on wages and employment.
Unfortunately for them, the situation is quite bad for US now and raising interest rate has serious repercussions, so nobody is really sure to what extent can the Fed really raise interest levels to:
1) Level of debt - As you have mentioned, 30 trillion and growing debt makes increasing interest rates prohibitively expensive. Current interest to GDP is relatively low at 1.5%, but can easily hit high single digit if interest normalizes. The good news though is the effect is not instant and will only gradually set in as expiring debt gets rolled over, but the underlying problem is still there over the mid to long term.
2) Too much money, too little avenues to invest in productivity - With the hollowing out of many actual employing industries and unfavorable legal and labor environment, there isn't really a lot of place for the money to go into producing real value add. If the Fed's not careful, all this money coming into the US will all flow into financial engineered products from traditional instruments like bonds, properties, stocks to funky items like crypto and NFTs. End up only forming financial bubbles with no real positive outcomes in income, employment and inflation. Could worsen social divide as the rich continue to get richer through "investments".
3) Not enough money come in - That's also a disaster, because it's the opposite of a financial bubble. The tightening of monetary policy pops the current bubble and money gets scared out of stocks, properties and crypto resulting in a collapse of wealth especially the 401K accounts. This rapid decrease in confidence and net worth could spook out spending and lead to a recession.
4) Slow down debt increase - With the increase cost of debt, the government will also be forced to slow down its debt increase in order to manage interest payments. This means not enough money to maintain all the freebies that have been liberally given out to the masses to keep them happy, a cutback on welfare will likely lead to social instability and have a devastating impact on elections for the Biden administration.
In short, the environment is very difficult for the US now. Do nothing and letting inflation run rampant is not viable long term, do something it's danger everywhere and one wrong calculation could mean disaster. They are really treading on a very thin nano line.
