The Fed Throws Gasoline on the Inflation Fire

[cmartenson (Chris Martenson)]

Originally published at: https://peakprosperity.com/the-fed-throws-gasoline-on-the-inflation-fire/

The Fed just made the biggest policy error in recent memory. I know, one could argue that their zero interest rate policies during the twenty-teens were the OG policy error that set the stage for this one, but that does not excuse or minimize doubling down on the error.

First, the case for cutting interest rates was not just weak, but one could more readily make a stronger case that rates ought to have been hiked.

Cutting interest rates is done to make what they call ‘financial conditions’ easier. Well, there’s absolutely nothing ‘tight’ about the amount of money sloshing about the globe right now, as measured by something called ”M2:”

If you can see anything tight in those skyrocketing charts, you probably work for the Fed or on Wall Street.

Worse for US citizens (I refuse to call them the derogatory term ‘consumers’ any longer), is that inflation has been running extremely hot for the past five years, and far beyond the Fed’s laughable and completely ignorable lip service about a 2% target:

The prediction here is simple: there’s a lot more inflation on the way.

Inflation was already not contained, and the Fed decided to throw more gasoline on that smouldering fire.

Which means the Fed opted, once again, to reward financial asset holders (principally the top 10% of society) and make the other 90% foot the bill in terms of stolen purchasing power, which the Fed and its MSM apologists euphemistically call “inflation.”

Paul Kiker gave us an extensive discussion about how his firm goes about strategically managing risk and dynamically switching financial sectors when their tools say to. It’s well worth a listen, and hopefully it sparks some questions you can ask your current portfolio manager. Or give Paul’s firm a chance to take you through a thorough financial planning and strategy process by clicking this link and filling out a simple form to get the process started.

We also discussed how the Trump administration has completely thrown in the towel on anything even remotely resembling fiscal restraint. How bad is it?

In August 2025, the deficit was as large as all sources of income for the US government, meaning they took in 1x and spent 2x.

The future is remarkably easy to foretell: more printing, more spending, and more inflation. That’s the current trajectory, and we see nothing that’s going to deflect it from that path.

Plan accordingly. It’s going to take nerves of steel and a nimble approach to investing to avoid being ground up by these accumulating policy decisions.

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[redneck-engineer]

We are well past the point that some setting of federal funds rates will fix the economy or monetary system. There simply is not a level that can act as a solution.

Raising rates causes different pain than lowering rates.

Per Hayek, there is no ideal funds rate to be set by a central authority. Let the market decide. Period. But we’ve had the central authority running the show for too long and we’re looking at the consequences.

Some argue for replacing the staff at FOMC but that implies a central authority could “manage” the money supply well enough. I disagree. The only sustainable solution is ending the Fed and letting the market set rates.

So is lowering rates a mistake? I don’t know. It’s like arguing whether the government should set gasoline prices to $2, $5, or $10 per gallon. The premises behind the question are invalid and should be addressed.

It’s possible that inflation now provides a pressure release for the system, allowing it to limp along for a while longer rather than blowing it up with super high rates.

But is it better to blow it up now and rebuild or keep things going? I don’t know.

[mike-from-jersey]

@cmartenson

First, the case for cutting interest rates was not just weak, but one could more readily make a stronger case that rates ought to have been hiked.

That is exactly what I thought.

When the rate cut was announced - for the umpteenth time in the past 10 years - I put my face in my hands and said “I can’t believe that they are doing this. I know that I should know better by now but I still can’t believe they are doing this.”

More money for speculators, more inflation for the rest of us.

And it is going to be worse. Long bond buyers will understand that America is incapable of fiscal responsibility. Long bond yields will go up as buyers flee. Trump and company will be forced to try to funnel massive deficits through shorter term paper. Good luck with that. I guess it will be the fed to the rescue - but in reality there is no rescuing us now.

[davefairtex]

Something Ed Dowd said comes to mind: the market cuts rates - the Fed just follows. Perhaps the market knows that a problem is coming? Same reason that Buffet sold a bunch of things and is now in cash? [He likes to buy things on sale, I think]. No update to the series yet (DFF).

The market “cuts rates” by purchasing more of the underlying item - in this case, the 1 year.

Here’s the unemployment rate that Powell thinks is not all that dreadful.

[jbrayali (Josef Bray-Ali)]

I have been reading articles about interest rates my entire life, but in several interviews I recently watched with economist Richard Werner the more salient and predictive measure of inflation and prices is: bank lending for non-productive asset purchases.

Bank lending for asset purchases, to Werner, make a much bigger impact on all the pricing indexes, inflation graphs, etc.

The Federal Reserves rate to loan the US its currency is so meta-level I think it doesnt impact inflation at all, or not nearly as much as bank lending for leveraged buyouts, huge corporate mergers, real estate holdings, stocks, and other securities that make nothing, that produce nothing.

Banks need to be Too Big To Live, and broken up. Loans needs to for productive economic work only, or predominantly.

That would radically alter inflation - more, small, banks making small loans to build productive enterprise.

A return to the system envisioned by Alexander Hamilton, implemented by William McKinley. The American Economic System - a sovereign nation, with banks buying treasuries with gold or aome other stable commodity in exchange for National Bank Notes they can fractionally lend. Getting the US out of Triffins Dilemma due to our petro-dollar currency.

[westcoastjan]

Speaking of Ed Dowd…

https://x.com/DowdEdward/status/1968754799077208518

[mike-from-jersey]

That’s funny, but it’s true.

I remember one time I was in the City of London. I was right in the heart of the richest part of London.

I had never seen such beautiful women in my life. It was mind blowing.

[phecksel (PhilH)]

@mike-from-jersey

I guess it will be the fed to the rescue - but in reality there is no rescuing us now.

Fed has painted us into a corner with no escape. Borrowing just to pay off interest is coming soon.

[mike-from-jersey]

@phecksel

Fed has painted us into a corner with no escape. Borrowing just to pay off interest is coming soon.

That’s the problem. That is one of the things that worries me most in life. With Trump, we had a chance to fix things. Maybe it was the last chance. Maybe it was already too far gone and there was no chance. But whatever. Now it’s over.

I’ve tried to prepare as best as I could. I know it’s not enough. I also know it’s not my fault. But none of that matters. It’s coming. We can’t stop it.

[robie-robinson-2 (robie robinson)]

It may not be our fault, however, you can plant a garden; “ settle your mare.”

[phecksel (PhilH)]

@mike-from-jersey

With Trump, we had a chance to fix things. Maybe it was the last chance. Maybe it was already too far gone and there was no chance

I’ve written this several times before. No matter what party is in office, the national debt doubles every 8-9 years. This is the base definition of an exponential equation. All exponentials eventually go into steep growth area… and we are there now. Spending has only slowed slightly, we’re going into what I expect will be a massive recession, there is no escape.
.
Take the federal budget, the federal revenue, short term debt, and long term liabilities… take a bunch of zeroes off the Trillions, and put it into household figures. Below is the best I can find for 2024

Our household spent $68,000
Our household income is $49,000
See a problem already?

Short term debt (credit card in household terms) is $380,000
Long term debt (mortgage in household terms) is $2,000,000 (this number is really hard to pin down, I actually believe it’s higher than this)

If you had a client come to you with those kinds of numbers, you’d probably file bankruptcy. US can’t file bankruptcy, so now what? Congress has NOT been willing to cut spending. This is going to have a painful ending.

[mike-from-jersey]

@robie-robinson-2

It may not be our fault, however, you can plant a garden …

I just had a salad which included peppers from my garden.

[publiusflavius]

Inflation sounds somehow not as bad as currency debasement which is more accurate.

[chuck-in-belize]

Depends on whether you want a smaller one now, or a bigger one later.

But one must remember,
Those that do not learn the lessons of history are doomed to repeat them.
Those that do are doomed to watch while those who don’t, repeat them.

– Chuck

[jbrayali (Josef Bray-Ali)]

The Federal Reserve can buy what it wants, place the debt in some legal fiction, and everyone can carry on. Guys, they have been doing that with quantitative easing for over a decade now.

If we want inflation down, we must stop money creation to nonproductive asset buys - that is where the money is made from nothing that enters our economy.

[binkey]

I suspect the Fourth Turning is actually being delivered to us by an inescapable and natural mean reversal of political, social, and economic excesses rather than by any generation that forces a change.

[redneck-engineer]

See shadow stats unemployment numbers.

Much higher…. 20-25%since 2008.

[redneck-engineer]

@phecksel

Congress has NOT been willing to cut spending. This is going to have a painful ending.

Except it’s citizens who insist their benefits can’t be cut. Ultimately the blame is with them.

[phecksel (PhilH)]

@jbrayali

Guys, they have been doing that with quantitative easing for over a decade now.

In the video… how do you go bankrupt??? We’re in the quickening period now.

@redneck-engineer

Ultimately the blame is with them

Constitutional Republic. Voters have proved their level of stupidity, but the legislature should just say no. Failure of our system, political positions is a vocation, not an honor.

[larrythelogger]

@phecksel

Constitutional Republic. Voters have proved their level of stupidity, but the legislature should just say no. Failure of our system, political positions is a vocation, not an honor.

Yep. Like Steve Deace says, we’re not a nation of laws and never have been. We’re a nation of political will and always will be.