The Fed Is Scaring The Bond Market And Other Observers

As The Country Is Crushed In The Fed's Vice: Debt And Price Inflation

“Whoever controls the volume of money in our country is absolute master of all industry and commerce...when you realize that the entire system is very easily controlled, one way or another, by a few powerful men at the top, you will not have to be told how periods of inflation and depression originate.”

President James A. Garfield

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For the second time in two months, the Bank of Canada has lowered interest rates by 0.5% with a target policy rate now at 3.25%. On December 18, 2024, the Fed is expected to similarly lower interest rates again.

For the heavily indebted working class and corporations, lower rates cannot come soon enough.

The Fed Has Stuck Citizen Heads In A Vice

After 35 years of blowing sequentially bigger debt-leveraged bubbles with sequentially lower interest rates and higher debt levels, the Fed has now maneuvered the country into an intolerable bind.

1. On One Side: Higher Cost of Living Driven By Fed Monetary Debasement

The Fed is now loosening monetary policy (once again) however this time it is doing so into the teeth of high consumer goods price inflation. While the Fed’s opiated measure of inflation, the CPI-U, shows goods price inflation relatively stable at 2.7%, other more detailed cost of living measures are telling a different story.

The Truflation CPI index tracks 13 million prices on a daily basis and it is already showing, once again, a sharply increasing cost of living rate as the Fed loosens monetary policy / debases the currency through lowering interest rates.

Figure 1 - Truflation CPI Index; source: Truflation.com Dec. 11, 2024

The Fed claims that price inflation is due to shortages however goods price inflation operates on an 18+ month lag to monetary debasement and the Fed is once again loosening the money supply as can be seen below.

Figure 2 - Rate of Change YoY of Money Supply (TMS=True Money Supply: blue; M2 = M2 Money Supply: gray); source: Mises.org / Ryan McMaken

2. On The Other Side Of The Vice: Crushing Debt

As noted previously, current small bank consumer credit delinquency rates and current as well as projected default rates for leveraged corporate borrowers is pointing toward what may be a disruptive credit market event. This should not be a surprise as the Fed recently steered interest rates to 0% for the better part of a decade followed by a snap rate rise to 5%.

While debt relief is needed, many have already seen an intolerable rise in their cost of living and are unable to go another round with the Fed.

Now Things Are About To Get Wild

A further issue with loosening monetary policy now is that national financial conditions are already very loose.

The Chicago Fed National Financial Conditions Index, where zero represents average financial conditions since 1971 and a negative value indicates loose financial conditions, shows that market financial conditions are already very loose.

By further loosening at this point, the Fed is going to drive financial markets wild - until they inevitably crash back down again.

Figure 3 - Chicago Fed National Financial Conditions Index; source: Chicago Fed

The US Treasury bond market seems to sense something is amiss with yields generally rising since the Fed’s September 18, 2024 0.5% rate cut.

This makes sense if Treasury traders are sensing increasing goods price inflation (degraded currency buying power) is coming and will put the bond market directly at loggerheads with the Fed.

Figure 4 - US 2, 10 and 30 Year Treasury Yields; source: tradingview.com

Next Comes QE - And A Currency Crisis

This is all heading toward the Fed once again implementing Quantitative Easing (QE) printing currency and buying bonds and financial assets to fake financial market prices - and ultimately a currency crisis where grossly inflated financial capital pursues real assets triggering rapid onset of extraordinary goods price inflation.

That is where monetary central planners always end up.

Best regards,

David Jensen