The latest FOMC statement was released with a unanimous vote to maintain the federal funds rate between 4.25% and 4.5%.  Jerome Powell and the Fed are apparently still a little concerned about price inflation while still assuring us that the economy is strong.

Powell is obviously not listening to Donald Trump, who is a low interest rate guy, now that he is president again.  I am not saying that Powell and company are purposely going against Trump, but they aren’t really following his wishes either.

The Fed is actually engaging in the correct policy right now, if such a thing is possible in the world of central planning.  Interest rates and the money supply should be determined by the market, but given that we have a central bank, I believe it is better for us if they don’t engage in a loose monetary policy.

The problem is everything the Fed did before 2022.  The Fed massively inflated from 2008 to 2014 while keeping short-term interest rates near zero.  It started inflating again in 2019 and really went crazy in 2020 and 2021.  We finally started feeling the impacts with rising prices.  Next, we are going to experience the reallocation of resources, which is the recession phase.

The Fed will also maintain its current policy of reducing its balance sheet (i.e., deflation).  The balance sheet is still near $7 trillion, but a reduction of $60 billion per month is nothing to laugh at.  If the Fed maintains this policy and doesn’t go back to monetary inflation, the recession will be here soon enough.

The Yield Curve

It is amazing how little coverage has been given to the yield curve.  It was inverted for all of 2023 and most of 2024.  It is still quite flat, but it has normalized, meaning that long-term rates are once again higher than short-term rates.  This means that the recession should hit within 12 months, but probably less.

Maybe this time really is different.  Almost every financial media personality has a reason why this time is different, if they address the issue at all.  There are always things that are different, but are you willing to bet against a recession?  The inverted yield curve has been a rather accurate predictor of recessions in the past.

When the recession hits, if Trump wants to blame someone, he should blame Trump of 2020 for being suckered on all of the COVID hysteria and going along with the lockdowns and massive bailouts.  All of the money that went to people that weren’t allowed to work and to businesses that weren’t allowed to operate had to come from somewhere.  It came from the digital printing presses.  That gave us the price inflation in 2022 and 2023.  It helped give us Trump’s re-election.  Now it will give us the recession.

The Presidential Blame Game

The president tends to get too much credit for a good economy and too much blame for a bad economy. Congress has to approve the spending, and the Federal Reserve is responsible for creating the money out of thin air and manipulating interest rates.

It will be interesting how Trump will react if and when a recession hits on his watch.  I’m sure he will try to deflect the blame, and some of it will be legitimate.

I think any Trump tariffs should get blamed at least a little bit, but I also think we are getting a recession with or without additional tariffs.

The bad part is that Trump has actually done some good things in the short time he has been back in office.  It looks like he is making a genuine effort to cut back regulations and actually reduce government spending.  This is an almost winless war in Washington DC, as any spending cuts are going to be met with hard resistance.

Still, we need drastic spending cuts for the sake of our living standards.  I just fear that a recession will coincide with an attempt to cut spending, and the spending cuts will get the blame.  This would be the exact wrong lesson.

All we can do is tell the truth and try to get it out there.  Libertarians should explain the causes of recessions and how a turn to free markets will improve our lives.  We should criticize Trump when he does something bad, and we should praise Trump when he does something good.

The truth is slowly getting out there.  Libertarians are influencing the way things are going.  Even if a recession hits, I don’t think most people are going to say that we should return to the Joe Biden economy.

When the recession hits, we need to continue to teach, to write articles, and to spread our message to those who are willing to listen.  Some of those people may get to people close to Trump.

While there may be tough economic times ahead, there is good reason to have hope that we are at peak government right now and that the beast will finally be rolled back.