Every day the Federal Reserve fails to hike rates, it is effectively easing monetary policy. This inaction allows already loose financial conditions to continue stimulating the economy, creating significant inflationary pressure and pushing the Fed further behind the curve.
The Fed's policy models are failing because they haven't adapted to a new demographic reality. After being slow to recognize the deflationary effects of demographics last cycle, they are now missing the inflationary pressures of the current one, such as lower labor supply, leading to persistent policy errors.
In an environment of supply chain shortages, investors should favor commodities essential for economic activity over monetary proxies like gold. Copper is critical for building data centers and its value is driven by real demand and scarcity, unlike gold's more abstract story.
Official interventions to prevent short-term economic pain, like managing oil prices or backstopping banks, stop market forces from curbing inflation. This allows the problem to worsen, ultimately requiring a much more severe policy response later, similar to the lead-up to the dot-com bust.
Unlike past cycles where consumer savings react with a lag *after* policy changes, the Fed's constant forward guidance about future cuts caused savings to decline preemptively. This demonstrates the immense power of central bank communication in shaping immediate consumer behavior.
With policy remaining too loose, financial conditions will continue to boost the economy and corporate earnings, creating the conditions for a parabolic "melt-up" in risk assets. This trend will likely persist until a breaking point is reached: oil hits $150, the 10-year yield breaks recent highs, or the Fed pivots hawkishly.
Despite oil prices doubling, the economy didn't slow down because energy now constitutes a historically low share of consumer budgets. Instead of cutting back, confident consumers simply drew down their savings to cover the higher cost, turning the energy shock into a pure inflationary impulse rather than a demand-destroying event.
The Fed consistently underestimates inflation and growth because its policy is anchored to a flawed model (HLW) suggesting a 3.1% neutral rate. More adaptive models and real-world data from interest-rate sensitive sectors point to a neutral rate closer to 4.5%, explaining why current policy is actually stimulative, not restrictive.