Can the FED raise rates at this point?
I was asked by a reader if I thought the Federal Reserve would have to increase the FED funds rate any time soon and what I thought would happen if that occurred.
I doubt the FED can raise interest rates much more than perhaps 25 basis points, if at all, and its economists will continue to conclude that much of this current round of inflationary pressure will recede once the Iran War is over. Perhaps the Fed is correct..
The FED back stops everything
Let’s take a step back and look at how much the Fed’s role in underpinning the economy has transformed since 2008.
In the wake of the GFC, The Federal Reserve has taken on a number of tasks that it previously refused to undertake. Besides adding many trillions of Treasury securities onto its balance sheet, every crisis leads to more Fed control over the credit markets and banking sector.
These actions that have consolidated and centralized control at the Fed and has led to market participants taking on added risk, since most believe that the FED will bail out any problem sector. And these market participants are correct, based on the actions of the FED over the past 18 years.
The elimination of default risk
This Fed’s implicit insurance policy against default risk has helped tremendously. Firstly, it is guaranteeing that the federal government stay in business regardless of debt levels and deficits. Secondly, it has allowed the market participants to continue taking on risk and investing in previously uninvestable sectors as the overall risk previously was too great when we calculated through traditional methods.
Although the FDIC insures bank accounts up to $250,000, we observed that the Fed effectively insured every dollar parked in the accounts of a members bank. Thus, default risk elimination has allowed bond yields to remain relatively low, considering inflationary risks, since it seems that default risks have been essentially eliminated.
Banks effectively have the green light to continue taking on added risk with their lending practices in their search for extra yield on their deposits. Investors are willing to more lightly discount future cash flows. Bond investors are willing to accept lower total returns.
Moreover, the Federal Reserve’s promise to keep the USG in business has led to a massive increase in M2 levels. Yes, all this money is chasing limited supply. And it clearly seems to be in the best interest of the FED as well as the US Treasury to under report true price inflation on a continual basis.
So, we shouldn’t be surprised to see higher stock and asset prices, along with their higher income streams. Thus, by function, QE and the Fed’s enabling of the USGs deficit spending continue to feed the very wealth inequalities that both entities claim to be addressing.
The roaring asset markets support bond prices
One of my main premises in my ongoing studies rests with my underpinning theory that the roaring asset markets, by function, assist the Federal Reserve in absorbing all of the newly issued Treasuries.
Why? I think the answer is straightforward here. The amount of potential collateral that is now on the the collective investing balance sheet, and that is available to buy Treasuries, is unprecedented in human history.
Despite the growing balance sheet inequalities of the population, the total amount of assets that can be used as collateral to buy most anything continues to balloon. Thus, it’s easier for this economy to absorb the securities that result from federal deficit spending
What would cause the Fed to resume QE?
So, what would be the catalyst for the Federal Reserve to go back into the market and begin purchasing treasury securities on a wholesale basis again? My answer is simple here. If we got a stock market retracement of any large size that requires massive liquidations across the board, like during covid, this would be the catalyst for the Fed to do a 180° and begin adding trillions on to its balance sheet once again.
I submit to the reader that these rising asset markets can only help so much. Although stock market seems reasonably priced on a forward PE basis, this can completely and rapidly change if there are mass financial liquidations, like in early 2020. The asset markets are highly levered, since the FED has essentially backstopped everything, and if things unwind, so to speak, the FED will have to step in once again to buy and then to consolidate its control over the markets. It’s rinse and repeat.
The current Fed chairman, Kevin Warsh, seems to be intent on unwinding some of the Federal Reserve’s assets on its balance sheet. I either think he’s being willfully ignorant in this regard or he’s just saying it for public consumption. I choose the latter.
An enabling Fed
The result of all this leads to an effective suppressing of bond yields, especially that of the 10-year Treasury. I still have a hard time wrapping my mind around the fact that the 10-year yield is not too far away from headline CPI.
The FED figures that if it can support the asset markets by eliminating as much investment risk as possible, while cultivating wildly priced stocks and other assets, it can pretend that the market is absorbing the ongoing massive issuance of government securities and all the interest income these Treasuries provide investors, without causing price inflation.
An unprecedented set of circumstances levitating the stock and Treasury markets
And there are people out there wondering why asset prices are so high. Think about it; we have elevated inflation growth, which juices revenue streams, coupled with artificially low bond yields and money market rates. All of the massive Federal deficit spending is translating into escalating M2 growth. All of this money is increasing demand with limited supply.
I also note that since its covid interventions, the Federal Reserve has essentially established a precedent of guaranteeing a back stop for all the major credit markets. And we wonder why there never seems to be a credit meltdown, even though traditional investment logic would dictate otherwise.
If the Fed truly wanted to pretend to show restraint, it would cut the size of its balance sheet and raise interest rates to compensate for the higher run rate of inflation. But the FED is not going to, because it no longer can. If the Federal Reserve was truly interested in taming inflationary pressures and being as hawkish as it claims to be, the 10-year Treasury would zoom past 5% within weeks.
Since the GFC, the FED has allowed its member banks to park excess cash at the FED window for interest. Though the Fed has intimated it could eliminate or deemphasize this feature, I doubt it will.
The reason for this is simple. By allowing banks to park excess reserves at the Fed it eliminates a lot of potential risk for these banks as they can earn interest income essentially risk-free. And the Fed seems to be in the business of eliminating as much investment risk as possible. With the overall supply of US Treasuries continuing to spiral every year, the FED cannot afford to add risk to the system at this point. Unfortunately, by blowing up the asset markets, the FED is creating the very risk it is trying to eliminate.
The Fed needs to stop pretending about a 2% inflation target
Here’s another observation I’ve been making. As long as the Federal Reserve continues to support the asset markets the way it has been, there’s absolutely no way the Federal Reserve can maintain its credibility by saying it’s still attempting to reach a 2% inflation target. That’s just foolish conversation at this point and I do note the Fed’s lack of emphasis regarding this mandate lately.
The Federal funds rate is now below annual CPI levels once again. And while the FED has taken its foot off the QE throttle, it has been eliminating much of the traditional risk pricing factors of the past. For now, the FED is letting the asset markets do all the heavy lifting.
Yes, the Federal Reserve should just come out and say that a 2% inflation target is no longer achievable, given the growing Federal deficit spending. It should be honest and say that a 3% target is the new 2% target.
The Fed should come out of the closet, but it’s in denial. The FED should just come out like Donald Trump and admit that it loves inflation. The FED should be loud and proud and exclaim what everyone else already knows.
Good stuff.
Initial Jobless Claims
Act: 226K Cons: 225K Prev: 230K
Continuing Jobless Claims
Act: 1,810K Cons: 1,800K Prev: 1,786K
Jobless Claims 4-Week Avg.
Act: 223.25K Prev: 219.25K
Philadelphia Fed Manufacturing Index (Jun)
Act: 10.3 Cons: 9.8 Prev: -0.4
Philly Fed Business Conditions (Jun)
Act: 50.2 Prev: 53.2
Philly Fed CAPEX Index (Jun)
Act: 41.20 Prev: 30.90
Philly Fed Employment (Jun)
Act: 7.9 Prev: -2.8
Philly Fed New Orders (Jun)
Act: 27.3 Prev: -1.7
Philly Fed Prices Paid (Jun)
Act: 53.20 Prev: 47.90
Off topic, we are looking at readers for my 5 yr old grandson and came across a highly recommended one by Phyllis Schlafly. I didn’t know much about her so I looked her up and found an ERA debate from 1975.
https://youtu.be/WncN6PWEMGo?si=qJWEGICfenMy61tj
Phyllis is a champ, so intelligent and well spoken – how could family values lose? . She gets Betty the bumbling jew on the ropes almost constantly and the moderator is just dumbfounded most of the time. Their side won anyway, 50 years later – to the victor go the spoils. We even have a pervert with adopted children running the Treasury. It’s like that with everything, the adversary was leading us to these end times.
Yes. She was definitely unique. Well educated and well spoken. She knew what she was talking about. Up until about 12 to 13 years ago, she would appear on Patriot radio with short commentaries between shows. She remained active up until close to her death.
When people like Mrs. Schlafly dies there’s no one to replace her. The slow grind to oblivion continues.
FOMC projections. Still sticking with the 2% inflation target.
Interest Rate Projection – 1st Yr (Q2)
Act: 3.6% Prev: 3.1%
Interest Rate Projection – 2nd Yr (Q2)
Act: 3.4% Prev: 3.1%
Interest Rate Projection – Current (Q2)
Act: 3.8% Prev: 3.4%
Interest Rate Projection – Longer (Q2)
Act: 3.1% Prev: 3.1%
Fed Interest Rate Decision
Act: 3.75% Cons: 3.75% Prev: 3.75%
Summary of Federal Reserve economic projections, June 17th 2026
https://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20260617.pdf
USD looking good. USA, Inc. keeps moving forward… Like a steamroller. Own the assets.
They had to end the Iran charade for the 250th Happy bday USA celebration. Would be odd if some sort of negative event happened, the market correction seems more than overdue and everyone is sick of seeing fireworks. However it can keep pumping from here. I never thought I would see CAT stock this high I posted it here when it was below 300, didn’t hold it. Post a photo of your new wheels if you get one.
Trump didn’t even seem to care that the Fed may have to raise rates later this year. All WWE wrestling. The asset owners are the real winners 🏆🏆🏆
The people continue spending. No gloom and doom allowed on the site. The economy rocks, for those who can collect revenue.
Core Retail Sales (MoM) (May)
Act: 0.8% Cons: 0.6% Prev: 0.7%
Retail Control (MoM) (May)
Act: 0.7% Cons: 0.4% Prev: 0.5%
Retail Sales (MoM) (May)
Act: 0.9% Cons: 0.5% Prev: 0.4%
Retail Sales (YoY) (May)
Act: 6.88% Prev: 4.79%
Retail Sales Ex Gas/Autos (MoM) (May)
Act: 0.5% Cons: 0.4% Prev: 0.5%
FOMC announcement definitely more hawkish than anticipated with the members believing that some of this inflation will be a persistent issue even past any military actions. Oh well.
Another schvartze with no impulse control. Murders a 40 year old Caucasian mom. It’s not all of them, but it’s always them.
Indiana mom killed protecting son during Facebook Marketplace robbery, 18-year-old suspect arrested
https://nypost.com/2026/06/17/us-news/indiana-mom-jean-gragg-killed-protecting-son-during-facebook-marketplace-robbery/
Correct! 16% of the population commits most of the crime! Especially black on white! When in public; situational awareness!
13%
Worse than I thought!
A brief story. I had to go to the DMV this morning, which I am loath to do. Its in a medium size town and I don’t like being their but sometimes it’s unavailable. As I was being waited on at the counter, there was a large black man also waiting seated behind me. I noticed the clerk looked up, so I turned to see what got his attention. A elderly white lady with a walker was slowly making her way to a chair directly in front of the black guy. As she approached the chair I noticed he had his hand on the back of her chair. I kept looking at him as she slowly got herself settled in the chair. As she sat down, I nodded to the black guy and went about my business. Was he being polite or something more sinister. I guess I’ll never know.
Tomorrow is the big day. FOMC meeting concludes and Warsh has his first press conference.
Price data is hot! Housing starts really disappointing. Wow. Warsh has his work cut out for him.
Housing Starts (May)
Act: 1.177M Cons: 1.430M Prev: 1.392M
Housing Starts (MoM) (May)
Act: -15.4% Prev: -8.5%
Building Permits (May)
Act: 1.413M Cons: 1.420M Prev: 1.423M
Building Permits (MoM) (May)
Act: -0.7% Prev: 4.4%
Export Price Index (MoM) (May)
Act: 1.3% Cons: 1.2% Prev: 3.5%
Export Price Index (YoY) (May)
Act: 11.2% Prev: 8.8%
Import Price Index (MoM) (May)
Act: 1.9% Cons: 0.9% Prev: 2.0%
Import Price Index (YoY) (May)
Act: 6.7% Prev: 4.2%
The New York Times, Bloomberg, Bongino, and many other “news sources” have falsely reported a US-Iranian peace deal, and the oil market is pricing based on the mistake.
What are the real facts? Next Friday on June 19, the US and Iran allegedly will sign a Memorandum of Understanding based on Iran’s 14-point proposal that requires the US to end its distant semi-blockade of oil flows that Iran allows through the Strait of Hormuz and Israel will stop its attacks on Lebanon, which are mainly war crime attacks on civilians, the only kind of war the IDF is capable of “fighting.”
Celebrating in the White House President Trump misrepresented the Memorandum of Understanding as a completed peace treaty and bragged on himself as the first leader to achieve peace with Iran. But the Memorandum is not a treaty. It merely initiates a 60-day negotiation to reach a comprehensive agreement on the disputed issues.
Meanwhile, Israel continues to violate the Memorandum with attacks on Lebanon. This morning Iran’s PressTV reports: “Shortly after the announcement of a memorandum of understanding between the US and Iran, which included the end of the war on all fronts, including Lebanon, Israeli occupation forces pressed ahead with their assaults on the Arab country, violating the deal.”
War is peace
Ignorance is strength
Freedom is slavery
Its all a big show! Smoke and mirrors, hocus pocus!
It’s all very real. Who’s engineering it and so forth is another matter. Whether it’s taking place the way the press outlets say is another matter.
Oh yes, the effects are very real!
Something else of interest. Iran is still alive and functioning so they can join the Ezekiel 38 war of the near future. Although, I suspect that we are in a flimsy pause at this point! Its not over, till its over.
So to the point. Everything is hunky dory now that Trump signed a peace deal with Iran. It’s a great deal!, yeah right. Just like Neville Chamberlain proclaimed after signing a deal with Adolph Hitler” peace in our time”. Most of us know what happened after that peace deal. History tells me that whenever they proclaim peace and security, things will get ugly real fast. This whole thing is a psy op.
Trump is hiding the fact that we can’t fight with Iran without it getting very messy. If we continued the war we probably wouldn’t win. Iran is a lot more formidable than Trump will admit so Trump looked for the first and very unfavorable off-ramp.
The quiet part out loud is that Iran has won this thing. The USA has accomplished nothing since starting the Iran war except higher oil prices and more restrictive supply.
Trump really is a Judas Goat for the USA.
The Establishment won. The average person in Iran or the US didn’t win. The income generating asset owners won. They always win. Own the income generating assets. Income streams continue to rise and so do the asset prices.
It’s mind-blowing on how a properly positioned portfolio of income generating assets can be so profitable post 2008.
Correct on the “establishment”! Don’t focus on the politics and the left right side of things. A demonic agenda is being worked out. The nations of the Earth are pawns in a sophisticated game of chess.
Trump is not deciding anything! He is following orders, and is a great carnival barker for the ” establishment”!!!
Yes, the Fed should just admit their role is no longer about controlling inflation, because it never was! Just say it! As you said, its about levitating the markets and keeping the government alive. Thus is pure hocus pocus! All the investment tools of the past seem to be out the window. Its like dealing with the mafia!
The classic investment analysis tools were thrown out the window since 2008.
Right!
Month over month numbers disappoint.
Capacity Utilization Rate (May)
Act: 76.2% Cons: 76.2% Prev: 76.1%
Industrial Production (MoM) (May)
Act: 0.1% Cons: 0.3% Prev: 0.9%
Industrial Production (YoY) (May)
Act: 1.67% Prev: 1.37%
Manufacturing Production (MoM) (May)
Act: 0.0% Prev: 0.7%