Federal Reserve pauses interest rate hikes and silver price rises

The world's key interest rates remain at 5.25 - 5.5% for now. With this, the Federal Reserve (the Fed) is taking an interest rate break. However, most Federal Reserve bankers expect a later increase this year. A statement issued by the US Central Bank on Wednesday after an interest rate meeting of the Fed's open market committee said that the board was counting on a peak interest rate of 5.5 to 5.75% later this year.
 

Interest break

The reason for the interest rate pause is that inflation is declining, and the current series of interest rate hikes still needs to be absorbed by the economy. An interest rate increase typically becomes “visible” in the economy only 12 to 24 months after it is implemented.
Jerome Powell, Chairman of the Federal Reserve, expects interest rates to remain high for an extended period to address inflation structurally. Central bankers are still not convinced they will achieve the 2% inflation target. The economy is performing relatively well, but the 10-year yield in the U.S. is currently around 4.4%, the 30-year mortgage rate is nearing 8%, and credit card debt interest rates are above 23%. Given the excessively high levels of government debt worldwide, maintaining higher interest rates is essentially unsustainable.
 

High government debts

The U.S. national debt has grown to $33 trillion, resulting in a debt-to-GDP ratio of 123%. About 40% of this debt needs to be refinanced in the short term. With interest rates previously below 2% now exceeding 4%, this could become a serious issue.
But within Europe, we are also seeing rising interest rates and concerning debt positions. The Dutch government debt stood at 46.9% of GDP at the end of the second quarter of 2023. This means the Netherlands still comfortably meets the monetary union's rules, as it has been agreed at the European level that government debt should remain below 60% of GDP.
 

Less confidence in the euro

However, many other European countries do not meet this requirement. For example, Italy has a debt-to-GDP ratio of 144.4%, with interest rates at 4.5%. Similarly, Portugal (113.9%), Spain (113.2%), and France (111.6%) all exceed 100% and are unlikely to ever fall below the European Commission's 60% threshold.
This is one of the reasons why many people are losing confidence in the euro. The countries within the monetary union have vastly different financial disciplines, and sooner or later, this is likely to escalate.
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Interest Rate Hikes and Gold and Silver Prices

Two weeks ago, we wrote about the impact of the ECB's interest rate hike on gold prices. Despite significant rate increases, gold managed to perform well. Silver, on the other hand, lagged behind but recovered this week with a 2.4% increase in price. As a result, silver investments still show a slight loss of 1.2% for the year.
 

 
An investment in physical gold has increased by 6.1% this year. The gold-to-silver ratio currently stands at 1/83, meaning one troy ounce of gold equals 83 troy ounces of silver, highlighting the undervaluation of silver. Since 2000, both gold and silver have risen by an average of 9% per year.
 

Source

van Bergen, W. (2023). Telegraaf. Geraadpleegd op 27 september 2023 via https://www.telegraaf.nl/financieel/2098789651/fed-houdt-rente-gelijk-maar-verwacht-nog-een-stap
Overheidsfinanciën (2023). CBS. Geraadpleegd op 27 september 2023 via https://www.cbs.nl/nl-nl/visualisaties/dashboard-economie/overheidsfinancien
Redactie Trends – Macro-economie & Beleid (2023). Trends. Geraadpleegd op 27 september 2023 via https://trends.knack.be/nieuws/macro-economie-beleid/staatsschuld-in-europa-daalt-belgie-bij-slechtste-leerlingen-van-de-klas/
 
Disclaimer: The Silver Mountain does not provide investment advice, and this article should not be considered as such. Past performance is no guarantee of future results.