Is the persistent inflation in the United States a deliberate outcome of fiscal policy, driven by increased government deficit spending and the Federal Reserve’s decision to maintain low interest rates and slow quantitative tightening?

In today’s economic climate, the persistent inflation gripping the United States appears to be no mere accident but a deliberate outcome of fiscal policy. The evidence? The nation’s monetary base, specifically the money supply measured as M2, has surged back to levels seen in March 2023 and has continued to climb almost every month since October of the previous year. This rebound occurs alongside U.S. government deficit spending, which effectively negates any contraction from the Federal Reserve’s balance sheet reductions. Despite the Fed shrinking its balance sheet by $1.5 trillion from its peak, the government deficit stubbornly remains above $1.5 trillion annually.

The Fed’s Role and Statements

As the Federal Reserve opts to keep interest rates steady, the broader implications of their decision-making process become apparent. Federal Reserve Chairman Jerome Powell recently indicated that no rate hikes are anticipated in the near future. Furthermore, the Fed has announced a slowdown in its quantitative tightening process, a move that seems counterintuitive given the current economic indicators of a robust economy with solid unemployment, consumption, and growth figures. Starting in June, the Fed plans to reduce the monthly redemption cap on Treasury securities from $60 billion to $25 billion, while maintaining other caps and reinvestments. This decision suggests a concerning prioritization of keeping the sovereign debt market stable over combating inflation.

Underlying Economic Pressures

This monetary policy direction may be partly explained by recent pressures in the Treasury yield curve, with the two-year Treasury yield hitting a precarious 5 percent. Such spikes in government debt yields have historically led to significant market corrections. The Federal Reserve, it seems, is more concerned with preventing turmoil in the bond market due to the unsustainable rise in government deficit and public debt than with curbing inflation.

Market Reactions and Implications

The immediate market reaction saw the two-year yield dip to 4.8 percent and the 10-year to 4.5 percent. This indicates a market that is increasingly reliant on Federal intervention to maintain stability, highlighting a significant disconnect between the Treasury’s debt supply and private sector demand. Moreover, concerns grow as global demand for U.S. Treasuries is questioned, despite foreign holdings at all-time highs. This disparity suggests that the demand is not robust enough to match the relentless supply of new government bonds.

International Dynamics and U.S. Fiscal Health

Interestingly, China’s holdings of U.S. Treasury bonds have decreased for two consecutive months, now standing at $775 billion, while Japan grapples with a weak yen, potentially needing to intervene and offload U.S. reserves. These international movements underscore a lack of confidence in U.S. fiscal health, contrasting sharply with the Fed’s ostensibly optimistic economic outlook.

The Perils of Current Fiscal Policies

The broader picture painted by these fiscal and monetary policies is bleak. By keeping interest rates low and delaying balance sheet normalization, the Fed is effectively ensuring that the brunt of the economic adjustment falls on the private sector—families and businesses—while the government continues to fuel inflation through unchecked fiscal policies. Chairman Powell, in his role, appears more as a fireman attempting to douse a raging inferno with a mere bucket of water while the government, akin to an arsonist, continues to escalate the blaze.

The ongoing economic strategies suggest a deliberate choice to sustain high inflation through continued expansive fiscal policies and a cautious monetary stance. This approach risks not only the immediate economic stability of the United States but also its long-term fiscal health, making it crucial for policymakers to reassess their priorities. The persistent inflation is not just a byproduct of economic cycles but a direct result of policy decisions, highlighting a dangerous gamble with the nation’s economic future.