Interest Rates, Inflation, and the Fed

Sponsored by: Patriot Home Funding

This morning, the Bureau of Labor Statistics released the September CPI number, their measure of retail inflation, which if the government shutdown continues, will be the last CPI number released before the next meeting of the policy making arm of the Federal Reserve Board of Governors.

The headline number was up .3% month over month and 3% year over year, both readings better than what economists expected. The core CPI, which is the reading without the volatile food and energy components, was up .2% month over month and up 3% year over year, again both beating market expectations.

As always, on the American Adversaries we take you inside the numbers so let's take a look inside the latest inflation report.

So, what is driving the numbers? For the month over month reading, half of the core services component, which is driving half of the total inflation number, is shelter related. For the year-over-year reading, the core services component is 2/3 of the total inflation number and 60% of that is shelter.

This tells you where the inflation both is and where it isn't. Where it is not is in President Trump's tariffs, regardless of what Jay Powell, the democrats, and the mainstream media have told you. Where it lies is in the cost of housing, the shelter component, and health care.

And what is driving the inflation in the shelter component? Two things: High interest rates and a squeeze on housing supply, and both of these conditions go straight back to the Biden administration and the Federal Reserve. The lingering effect of first the quantitative easing by the Federal Reserve, which is the fed buying treasury bonds and mortgage-backed securities to drive rates down and increase liquidity, and then the Biden Administration and congressional democrats' ridiculous $6 trillion spending spree in 2021 and 2022. Combined, those two policies drove inflation to a high of 9.1% in June of 2022, which drove interest rates up by over 5 full percentage points, from .25% to 5.5%.

Mortgage rates of course followed, which made housing unaffordable for a large swath of the population, particularly first-time home buyers. Also, the Biden administration increased the number of people in the country looking for housing by a conservative estimate of about 16 million through illegal immigration. So, increasing the population of the country by at least 5% in a 3-year period without a corresponding increase in housing supply caused competition for housing to increase, and drove both rents and home prices higher very quickly, which combined with the high interest rates needed to calm inflation, put us where we are today.

The good news is that Trump and the GOP won the election in November, and restored at least a semblance of fiscal sanity on Capitol Hill. Equally as good are the actions of the Federal Reserve behind the scenes. The Fed has been reducing its balance sheet, also known as quantitative tightening, which is the Fed selling off its holdings of treasury bonds and mortgage-backed securities, dramatically since the end of 2022. The Fed's reduction of its balance sheet flooded the bond market with supply and drove bond prices lower, which drove rates up, but it was necessary to restore a degree of balance.

The Fed's balance sheet now sits at about 21.5% of nominal Gross Domestic Product, which is the lowest asset to GDP ratio among major central banks, behind the UK which sits at 25%, the EU which sits at 40%, and Japan, which is at an alarming 110%.

Since 2022, that Fed balance sheet to GDP ratio has fallen by 14 whole percentage points, which is the largest asset reduction on record, for a total of $2.37 trillion, approaching pre-COVID levels. This is great news for our economy.

President Trump's America First policies have unleashed a historic level of investment in US business, and his tariff policies have made onshoring of US manufacturing and production attractive again.

Trump's energy policies of increasing supply and decreasing senseless bureaucratic regulation are reducing the price of oil, which itself is anti-inflationary and stimulates the entire economy.

Trump's border policies have slowed the rapid increase of demand for housing, goods, and services, without a corresponding decrease in supply, all of which is deflationary.

Finally, Trump's policy of reducing marginal tax rates and incentivizing capital investment will further spur economic activity, increase the Treasury's revenues, grow the economy, and slow the rate of deficit growth and with it, inflation.

So, the bottom line is this. Between the Fed's quantitative tightening and the Trump administration's border and economic growth policies, our economy is well positioned for an unprecedented run of stable growth and lower capital costs, which will lead to lower interest rates sooner rather than later, IF we don't manage to screw it up by electing democrats.

Also, these successes stand in stark contrast to and completely undermine the democrats' green new deal, their tax and spend policies, and especially Obamacare, which has increased the cost of health care by about 74% since 2010. That number is about 26% higher than overall inflation and such a debacle that the democrats have shut down the government over increasing government spending to partially offset the runaway costs their idiotic policy created in the first place.

So, We the People have a choice... embrace Trump's America First growth policies which are based on sound economic principle and will lead to lower interest rates, more goods and services, more jobs, and a rising tide that lifts all American boats. Or return to the democrats' policies of runaway spending, runaway inflation, and the cost of healthcare rising so fast that Americans can't afford it unless the government creates more money out of thin air- which increases inflation and decreases the value of your dollars- to pay for it.

The strength of our nation, our families, our economy versus a weak nation, riddled with inflation, a crippling deficit, economic growth that only benefits the uber rich, and government shutdowns to extort the American taxpayer and shift blame away from the guilty who enacted those idiotic policies in the first place.

I don't know about you, but the choice is easy for me... Trump 2028 baby.