The Fed to Pivot as Early as Q3 22?

Past Fed Chair Paul Volker has been invoked in countless discussions surrounding monetary policy these days. Many are wondering if current Chair Jerome Powell will have the resolve to exact the Volcker-style rate hikes necessary to combat inflation.

Macroeconomic expert Luke Gromen believes that this is more about math than Powell’s resolve. 

With federal debt-to-GDP at 125% and US tax receipts, which are highly correlated with overall stock market performance, set to fall considerably, this is a matter of the US government’s solvency - no matter the sitting Fed Chair.

Volcker lived in a different time. 

Debt-to-GDP was 30% when he began his tightening cycle. The federal deficit was around $60 billion per year (1.5% of GDP at the time). Today it is over 46x that amount at $2.8 trillion (over 10% of today’s GDP)! 

According to Gromen, the US government simply cannot fund its almost $600 billion in interest payments, the roughly $3.5 trillion in entitlement spending, and the $800 billion for national defense, without defaulting or revamping QE. In the face of historically high inflation, neither of these options bode well for the bond market.

Default, especially when it comes to domestic entitlements, is not a politically palatable position. Therefore, Gromen believes QE will return and inflation will not subside, bringing us into unprecedented territory.

Which assets will perform well under this regime? Gromen believes commodities will experience a secular tailwind and that even Bitcoin may catch a bid. To hear all his insights, listen to the full interview here:

Posted In: contributorsGovernmentMarkets

Ad Disclosure: The rate information is obtained by Bankrate from the listed institutions. Bankrate cannot guaranty the accuracy or availability of any rates shown above. Institutions may have different rates on their own websites than those posted on Bankrate.com. The listings that appear on this page are from companies from which this website receives compensation, which may impact how, where, and in what order products appear. This table does not include all companies or all available products.

All rates are subject to change without notice and may vary depending on location. These quotes are from banks, thrifts, and credit unions, some of whom have paid for a link to their own Web site where you can find additional information. Those with a paid link are our Advertisers. Those without a paid link are listings we obtain to improve the consumer shopping experience and are not Advertisers. To receive the Bankrate.com rate from an Advertiser, please identify yourself as a Bankrate customer. Bank and thrift deposits are insured by the Federal Deposit Insurance Corp. Credit union deposits are insured by the National Credit Union Administration.

Consumer Satisfaction: Bankrate attempts to verify the accuracy and availability of its Advertisers' terms through its quality assurance process and requires Advertisers to agree to our Terms and Conditions and to adhere to our Quality Control Program. If you believe that you have received an inaccurate quote or are otherwise not satisfied with the services provided to you by the institution you choose, please click here.

Rate collection and criteria: Click here for more information on rate collection and criteria.