The CPI data for December buoyed markets and raised hopes that the Federal Reserve is winning its war against inflation. But in his podcast, Peter explained that the Fed isn’t winning the war. It is losing and will ultimately surrender to inflation.
Markets rallied after the CPI data appeared to show further cooling in price inflation. Most people assume that means the central bank can be less aggressive and ease up on rate hikes in the coming year. And if there is enough progress, many people think the Fed will reverse course and start cutting interest rates later in 2023.
Peter said he agrees that there is a good chance the Fed will cut rates this year. And he thinks there is an even better chance the central bank returns to quantitative easing, whether it cuts rates or not. But this pivot won’t be because of a victory in the war against inflation.
No. They’re going to surrender. Inflation is going to win that war. The Fed is going to run to fight another battle — at least it’s going to try to fight because it’s going to lose that battle too. That battle is going to be recession, maybe financial crisis, maybe a battle to try to prop up the US government whose insolvency is becoming a bigger problem with rising interest rates.”
The US government continues to run massive budget deficits even as its interest costs rise. Interest payments on the debt rose 41% in 2022. According to the Peterson Foundation, the jump in interest expense was larger than the biggest increase in interest costs in any single fiscal year, dating back to 1962.
If interest rates remain elevated or continue rising, interest expenses could climb rapidly into the top three federal expenses. (You can read a more in-depth analysis of the national debt HERE.)
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