The Fed's rate hikes fail to address the root causes of inflation in housing, education, and healthcare. These sectors suffer from structural issues like regulation and bureaucracy. Higher rates can even be counterproductive, for instance, by stifling new housing construction, which restricts supply.

When national debt grows too large, an economy enters "fiscal dominance." The central bank loses its ability to manage the economy, as raising rates causes hyperinflation to cover debt payments while lowering them creates massive asset bubbles, leaving no good options.

When the prevailing narrative, supported by Fed actions, is that the economy will 'run hot,' it becomes a self-fulfilling prophecy. Consumers and institutions alter their behavior by borrowing more and buying hard assets, which in turn fuels actual inflation.

Due to massive government debt, the Fed's tools work paradoxically. Raising rates increases the deficit via higher interest payments, which is stimulative. Cutting rates is also inherently stimulative. The Fed is no longer controlling inflation but merely choosing the path through which it occurs.

'Fiscal dominance' occurs when government spending, not central bank policy, dictates the economy. In this state, the Federal Reserve's actions, like interest rate cuts, become largely ineffective for long-term stability. They can create short-term sentiment shifts but cannot overcome the overwhelming force of massive government deficit spending.

When government spending is massive ("fiscal dominance"), the Federal Reserve's ability to manage the economy via interest rates is neutralized. The government's deficit spending is so large that it dictates economic conditions, rendering rate cuts ineffective at solving structural problems.

Over the past few years, the Treasury Department and the Federal Reserve have been working at cross-purposes. While the Fed attempted to remove liquidity from the system via quantitative tightening, the Treasury effectively reinjected it by drawing down its reverse repo facility and focusing issuance on T-bills.

Large, ongoing fiscal deficits are now the primary driver of the U.S. economy, a factor many macro analysts are missing. This sustained government spending creates a higher floor for economic activity and asset prices, rendering traditional monetary policy indicators less effective and making the economy behave more like a fiscally dominant state.

The U.S. government's debt is so large that the Federal Reserve is trapped. Raising interest rates would trigger a government default, while cutting them would further inflate the 'everything bubble.' Either path leads to a systemic crisis, a situation economists call 'fiscal dominance.'