The Fed held its target range at 3.75% to 4.00% on Wednesday, with Lisa Cook and Beth Hammack dissenting in favor of another quarter-point hike. The ten-year Treasury yield was back just below 5% Thursday. I’m getting close to calling the top in the fed funds rate. That is a contrarian view: markets were still pricing a better-than-three-in-four chance of a December increase after the meeting. I think there is a decent chance the Fed ends up doing less than that pricing implies.
I keep hearing bitcoiners say they “can’t raise rates.” I disagree. The Fed can raise rates, and a government that borrows in its own currency has ways to keep making nominal interest payments. Treasury can issue debt while the Fed supplies liquidity and, if it chooses, buys government securities in the secondary market. Higher rates hurt private borrowers and increase the government’s financing burden. My point is that the financing burden can ultimately be met with more dollars. The constraint becomes how much damage and currency debasement policymakers are willing to tolerate.
Fed Chair Kevin Warsh and Treasury Secretary Scott Bessent both worked with Stanley Druckenmiller at different points in their careers. I would expect them to understand each other’s market instincts and the pressures on the other side of the table. I also expect coordination if financing conditions become genuinely threatening. That leaves plenty of room for higher rates and monetary support to coexist. We should stop assuming one automatically rules out the other.
I may be early on the rate peak. I remain much more confident about the longer-term response to a system carrying this much debt. They can defend the dollar’s purchasing power and absorb the consequences, or create more dollars to ease the financing pressure. My bet is on more dollars. I’d rather own the money they can’t print.
Happy Friday.