In February of this year, I forecast that the Federal Reserve, despite all the bluster about “higher rates for longer,” would eventually blink. Now, following last Wednesday’s FOMC announcement, that prediction has come true. The Committee, in a not-at-all-shocking reversal, has lowered the target range for the federal funds rate by half a percentage point, bringing it to between 4.75% and 5%, with more cuts to come.
For those paying attention—and not to the misleading “strong economy” propaganda—this decision was virtually inevitable. As I pointed out earlier this year, the Fed’s only path forward was to lay the groundwork for rate cuts, despite inflation still hovering well above their supposed 2% target. Because the truth was then and is now that economic and political pressures were always going to force the Fed’s hand. They just didn’t want to admit it.
But let’s not kid ourselves, this was a retreat, plain and simple. Just last December, the Fed was still talking about “additional policy firming,” hinting that higher rates were necessary to bring inflation down. But the tone has gradually but predictably shifted. In their latest statement, they speak of “gaining greater confidence” that inflation is moving toward 2% despite the August Consumer Price Index (CPI) reading being the only one in the past year that showed a clear departure from the recent trend around 3%, as well as the fact that the most recent Personal Consumption Expenditures (PCE) reading actually showed an increase in prices.
But no matter.
The Fed, faced with political pressure and an economy that, despite the glowing reports, is limping along on an increasingly shaky foundation, had no choice but to ease up.
It’s no coincidence that this rate cut is happening in an election year. The economy, or at least the version presented by the administration and its media allies, has to look good. You can almost hear the victory lap speeches now—”We’ve conquered inflation!”—but anyone with a pulse on reality knows that this is far from over.
Of course, another major driver behind the Fed’s shift is fiscal. Janet Yellen’s Treasury Department is staring down the barrel of a nearly two trillion dollar annual deficit. And thanks to her brilliant (read: disastrous) decision to avoid refinancing several trillion dollars of short-term debt when rates were low, the government now faces skyrocketing debt service costs. So, what’s the solution? Simple: lower rates, flood the system with money, and hope no one notices the real problem—the complete inability to rein in spending.
That’s right, folks. While the supply of money began growing shortly after the start of the year, the printing presses are going to really start warming up now. Forget “Modern Monetary Theory”—we’re in full-on “Monetary Magic Tricks” territory now. The Fed’s move is a lifeline for a government running on fumes, but it’s not without a price. Lowering rates might help the Treasury in the short term, but it only kicks the can down the road. Sooner or later, the debt will have to be reckoned with, and the result won’t be pretty.
Let’s not forget the banks in all of this. After all, they’ve been suffering through two years of bond portfolio hell as rising rates decimated their holdings, with unrealized losses still on the books totaling over several hundreds of billions. Remember Silicon Valley Bank (SVB)? That’s just one example of what happens when cheap money dries up. The Fed’s latest move is a sigh of relief for financial institutions across the board; recall that prices move inversely to rates. They’ll happily take the rate cut and the promise of more to come.
If that sounds like insanity, it’s because it is. But this is where we are: a world where short-term expediency trumps long-term economic health.
While the Fed may feel good about “balancing the risks” and seeing “progress” toward their inflation goal, the reality is that the dangers of this policy shift are all too real. By lowering rates now, they are re-opening the door for inflation to surge again. The pressures that caused inflation to spike in the first place—supply chain breakdowns, energy crises, and reckless spending—haven’t disappeared.
On top of which, the prospect of more tariffs and decoupling promises to increase price pressures significantly.
And then, again, there is the debt; specifically the cost of servicing those borrowings, which is currently on pace to cost over $1 trillion annually for the next decade. Lower rates may help ease the immediate pain, but they do nothing to solve the underlying problem of debt accumulation.
As previously stated, the only endgame is a technical or outright default on the national debt, as the weight of years of fiscal irresponsibility comes crashing down—the question is when not if.
In the end, this rate cut is a sign that the Fed has run out of good options. They can’t keep rates high without crashing the economy, but lowering them invites a resurgence of inflation and further fiscal catastrophe. Either way, the bill will come due. But for now, in an election year, the Fed has chosen the path of least resistance at the expense of the long-term health of the U.S. economy.
But, then, that rationale for the Fed’s existence was only ever a smokescreen for banks who wanted to socialize their risk and progressives who wanted to grow the power of the state.
