To the surprise of absolutely no one today, the Federal Reserve’s Open Market Committee chose to do nothing at the close of its two-day meeting. The White House is furious about the decision; the President believes that the Fed should be slashing rates, and that the current “high” rate of interest is costing the US government hundreds of billions of dollars each year in excess interest. (I put “high” in quotes because interest rates are still well below historic averages...) Now, I am no fan of the Fed. Quite the opposite— the organization is a total failure. Just consider that section 2A of the Federal Reserve Act (passed in 1913) states that the Fed is supposed to maintain a stable currency. Yet the US dollar has lost 97% of its purchasing power under the Fed’s stewardship over the past 112 years. Personally I think it’s difficult to find another organization that has been so terrible at its core mission for so long. Yet even with that scathing criticism in mind, it’s still not the Fed’s job to bail out the US government’s finances. If Congress and the White House want to pay a lower interest rate on the national debt, then they can make the hard decisions to cut spending, balance the budget, and attract foreign investment by acting like responsible adults. Unfortunately none of that seems to be in the cards. So instead there seems to be a clear plan being hatched: Project “Hijack the Fed”. Let’s start from the basics: In order to fund its roughly $2 trillion annual budget deficit, the US government has to sell debt (bonds) to investors to plug its funding gap. And this responsibility falls to the Treasury Department. Ordinarily, Treasury would sell a mix of US government bonds, ranging from ultra-short-term 28-day T-bills, to very long-term 30-year bonds. Lately, however, the Treasury Department has been focused on selling mostly short-term bonds... simply because those rates are lower. The yield on a 12-month T-bill, for example, is just 3.86%, whereas the yield on 10-year Treasury is almost 5%, so it’s a difference of roughly 1%. In some ways it’s sensible to take the lower rate. But it’s a risky strategy. If interest rates suddenly rise, then the US government could wind up paying even MORE interest in the next few years, just to save 1% today. So clearly the Treasury Department must have some confidence that rates won’t be going higher... and will probably be headed lower. Last month Secretary Bessent even said this out loud: “What I’m going to do is, I’m going to go very short-term. . . Wait until this guy [Fed Chairman Jerome Powell] gets out, get the rates way down, and then go long-term.” In other words, he’s going to keep selling the lower-interest short-term debt. Then, once Jerome Powell’s term as Fed Chairman ends next year, the Treasury Secretary thinks that HE will be able to “get the rates way down”, at which point he’ll start selling long-term debt to lock in lower rates. This is a stunning admission that the Treasury Secretary (and by extension the White House) think that they will be able to steer interest rates much lower through their new Fed pick next year. Coincidentally, Treasury Secretary Bessent also happens to be on Donald Trump’s shortlist to be the next Fed Chairman. So let’s skip over the obvious legal and reputational issues involved in such a move. The bigger problem is that there’s only one way for the Fed— even if Secretary Bessent becomes Chairman— to “get the rates way down”... and that is by expanding the money supply, i.e. what we often refer to as printing money. And just as we saw during the pandemic when the Fed printed $5 trillion, large-scale money printing can easily lead to some nasty inflation. Why it matters: We’ve been talking about the next inflation cycle for a while, explaining why 2033 is the key date to keep in mind; this is when Social Security’s major trust fund will run out of money,
