- The biggest victim of the Fed rate hikes is the US government, according to investor Barry Sternlicht.
- Higher rates means the US has to pay more money on interest expenses to service the federal debt.
The Federal Reserve's rate hikes have sent bond yields higher, slammed the housing market, and rattled the commercial real estate sector.
But the biggest victim might be the US government.
That's according to billionaire investor Barry Sternlicht, CEO of Starwood Capital Group.
"Today, the biggest victim of the Fed increasing rates is actually the federal government that now has to pay 5% on $33 trillion dollars of debt," Sternlicht said Wednesday at Saudi Arabia's Future Investment Initiative.
The fed funds rate has been hoisted to 5.33% from 0.08% since March 2022. It's the fastest pace of rate increases in 40 years, and in his opinion, rates have to come down from here.
"The Fed's going to have to relent, in my opinion, because they have no choice," he said. "None of the Western democracies can hold rates this high. They can't afford it. You wind up just printing money endlessly to pay interest expense on your deficits."
In fact, some experts fear that the rate hikes are going to bite so hard that the US could see failing Treasury auctions because no one will want to take on US government debt. America's credit rating has already been knocked down this year by Fitch Ratings, boosting concerns that Treasurys are not the safe haven they've long been perceived to be.
Sternlicht also noted that the pile of US debt is one of the key differences in the fiscal environment today compared to the last time the Fed hiked rates as aggressively in the 1980s.
"People who talk about Paul Volcker, and say that [Jerome Powell] is the disciple of Volcker, that 22% interest rates slowed inflation — Volcker didn't have a $33 trillion deficit. He had a $200 billion deficit. It didn't matter what rates were."
Adding to the weight of US debt has been the large fiscal stimulus packages the government has passed in recent years. Part of President Biden's economic policy has involved injecting segments of the economy with vast amounts of money. Spending programs like the CHIPS Act to boost domestic semiconductor production, and the Inflation Reduction Act and Infrastructure Bill, involve huge volumes of government spending.
These spending packages, Sternlicht argues, have been holding up the US economy, while at the same time, rate hikes have meant that private enterprises have slammed with higher borrowing costs.
"You have a tug-of-war between the federal government spending and the private sector saying, 'ouch these interest rates are hurting'," he said. "It will create future inflation. Like, we're not building enough homes. Nobody will build enough homes with interest rates this high."