You Can’t Solve a Fiscal Problem With a Monetary Tool

🤔Some economic thoughts:

I see many debating whether we are RESTRICTIVE vs LOOSE.

The Fed's own long-run dot says 3.3. They hiked to 3.875 and called it removing accommodation. One of those is wrong.

Either way it's the wrong tool. This inflation came from public spending. Rates work on private credit. A hike doesn't produce a barrel of oil, doesn't shrink a $2T deficit, doesn't reverse debasement. It raises the cost of money for whoever borrows off prime and calls it fighting inflation. That's a tax on the private sector for a problem the public sector created.

You can't solve a fiscal problem with a monetary tool. The serious combination is a smaller balance sheet, a held rate, and a smaller deficit. That's how the long end comes in. Not by hiking the end of the curve the Fed controls to fix the end it doesn't.

The loose camp says nominal GDP is 6.6% and equities didn't blink at a 120bp move in the 10-year, so policy is loose. Nominal GDP includes the inflation you're trying to kill, so that test always says loose. Test real against real: the real 10-year just crossed real growth. And equities didn't blink because they're pricing AI earnings, not cheap money. The rate can't reach that. The balance sheet can.

Counter: core has sat at 3.3 for four months and the hike is insurance against it broadening. Fair but supply shocks /= inflation. But it can broaden through wages, and wage growth went from 3.8 to 3.1 with real earnings down on the year. The spiral he's insuring against is unwinding on its own.

The tool can't reach the cause. You can't hike Congress.🏛️