The FOMC released its latest statement on monetary policy.  As expected, the Fed lowered its target rate by 25 basis points (0.25%).  The federal funds rate is now in a range of 3.75% and 4.00%.  The Fed will meet just one more time in 2025, but it is unclear if the Fed will cut again for its last meeting of 2025.

Jerome Powell pointed out that they have limited data because of the government shutdown.  The limited data gives the Fed an excuse to remain undecided on future rate cuts.  They probably really do want to see if price inflation continues to run high.  They also don’t know if and when this bubble is going to implode.

The CPI is still running at 3% (above the Fed’s supposed target of 2%), yet they are cutting rates anyway.  While the rate cut gets most of the attention, this isn’t what I believe was the biggest news.

The FOMC announced that it will stop its balance sheet runoff starting December 1, 2025.  In other words, we have one more month of approximately $40 billion coming off the balance sheet.

A Stable Money Supply?

The Fed has been slowly deflating its peak in 2022.  That was the same year that price inflation spiked higher.

Let’s recall that the balance sheet was just over $4 trillion when Covid hysteria hit in late February/ March of 2020.  It skyrocketed from there reaching a peak just short of $9 trillion in 2022.

Once the Fed finishes its quantitative tightening at the end of November, the balance sheet should stand at approximately $6.5 trillion.

So, we went from just over $4 trillion to almost $9 trillion in two years.  Now we are back to about $6.5 trillion another 3 and a half years later.  That is quite a ride.

But it is still over 50% higher from where it was at the beginning of 2020.  You can see why we have had the consumer price inflation that we’ve had.  You can also see why we’ve had the asset bubble we’ve had, which continues to this day.

Now that the Fed is going to a neutral monetary policy in terms of the base money, you have to wonder when quantitative easing (digital money printing) will be coming.  At this point, it should just take a big bank failure or a stock market crash to get the printing presses going again.

The Everything Bubble and Austrian Economics

When writing about the business cycle, Ludwig von Mises pointed out that you don’t necessarily need monetary deflation to bring on a crash.  If there has been an artificial boom, that boom will eventually come to an end.  Just a slowdown in a loose money policy can bring on the crash.  At some point the correction will happen.

Mises said that the only way to avoid the correction was to continually increase the rate of the growth of the money supply, which would eventually lead to a crack-up boom, which is really just hyperinflation.

Hyperinflation brings on its own correction, but it completely destroys the money.  Almost nobody should want hyperinflation.  Even government officials and central bankers don’t want hyperinflation because it could destroy their own wealth and power.

Even though this boom has lasted a long time, it doesn’t mean it can keep going forever.  We almost got a big recession in 2020, but the government handed out trillions of dollars to people with the help of the Fed.  This delayed the inevitable pain.  Now we have an even bigger bubble than what existed in early 2020.

The Fed is stopping its mild monetary deflation, but the damage is already done.  The damage was the massive monetary inflation and massive government spending over many years.

Yield Curve

With the Fed lowering shorter-term interest rates, the yield curve is normalizing.  It was inverted for 2023 and much of 2024.  Now that it is normalizing where short-term rates are lower than long-term rates, we are ready for a recession.

With stock indexes, gold, and Bitcoin all hitting new all-time highs, all the signs point to a massive recession ahead.  The Fed cutting rates by 25 basis points isn’t going to stop any of this.

The big question is what the Fed will do if and when a recession hits.  What if price inflation is still running at 3% per year?  You would think that a recession would bring this down, but that isn’t clear at this point.

Will the Fed just try to reinflate the bubble?  And what will happen to bonds?  What will happen to the dollar?  What insane things would Donald Trump try to do?

There are a lot of questions hanging out there.  The Fed is stopping its monetary deflation for a reason.  The CPI is still running high, but they are scared of something else.  Perhaps Americans should be more scared. Investors should be really scared.