I’m not sure why John Arnold chooses to publish this awesome content on Saturdays, but I am grateful for it, nonetheless. This is the follow-up from Ten31 and it is mandatory reading. The market has started pricing in rate hikes — the CME Fedwatch tool briefly showed coin-flip odds of some degree of tightening by year-end. The argument is that surging oil prices from the Iran conflict force the Fed's hand on inflation. Ten31's pushback is elegant and correct: the US fiscal position is so degraded relative to even 20 years ago that blended interest expense at current levels is already barely workable. Add any meaningful rate increase and you are looking at debt service costs that crowd out everything else in the federal budget. The idea that the Fed can get "meaningfully tighter" requires a political willingness for true fiscal austerity, which — as the team puts it — "lol, lmao even."
History tells you what happens when a sovereign faces a real threat to its hegemony during an inflationary shock. The sovereign prints. The exigencies of war and economic stability dominate any concern about headline CPI. Your grandparents lived through exactly this. The Fed may talk tough. The bond market may briefly price in hikes. But the math says they cannot actually do it. The printer wins. It always wins.
The one question for John: couldn't they print money and raise rates at the same time? I think this is what you allude to when you say "new alphabet soup facilities". This would be yield curve control or something similar. When you become the main buyer and seller of the treasuries, and you print the money they're paid in, you can kinda do whatever you want?