The Fed Just Made a Move That Could Backfire Completely

Sep 17, 2026

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The Fed Just Made a Move That Could Backfire Completely

The Fed raised rates again. Was it smart? Critics say they're ignoring consumer fear, energy shocks, and the real economy. Is this the start of a recession?

The Federal Open Market Committee (FOMC) recently raised the target range for the federal funds rate by a quarter of a percentage point, bringing it to 3.75% to 4%. This move, intended to support the Federal Reserve's dual mandate of price stability and maximum employment, has sparked debate about its potential effectiveness and unintended consequences. While the committee cited expanding economic activity, resilient domestic spending, strong productivity growth, and robust capital investment as supporting factors, critics argue that the Fed is overlooking crucial indicators of public sentiment and underlying economic fragility.

Economic Indicators and Divergent Perceptions

The FOMC's policy statement noted that economic activity is expanding at a solid pace, with job gains keeping pace with the workforce and a stable unemployment rate. However, a significant point of contention is the divergence between official data and the sentiment of the general populace. Many individuals, particularly those on the lower end of the economic spectrum, report feeling uncertain about their job prospects and ability to make ends meet. This sentiment is further underscored by a decline in labor force participation, as individuals opt out of job searches, a trend that some argue masks a weaker labor market than official figures suggest.

The argument is made that economic decisions, from consumer spending to investment, are heavily predicated on how individuals feel about the economy, rather than solely on data trends. While the Fed, under Chair Jerome Powell, focuses on identifying trends and maintaining monetary policy discipline, critics contend that this approach overlooks the pervasive fear and lack of optimism among a significant portion of the population. This disconnect between elite perceptions and everyday experiences is seen as a potential pitfall for the Fed's policy decisions.

Inflationary Pressures and Supply Shocks

Inflation remains a primary concern for the Federal Reserve, with the committee aiming for a timely return to its 2% goal. The recent rate hike is intended to curb inflation by reducing access to cheap money. However, a key debate revolves around whether the Fed is influencing inflation or merely responding to economic conditions.

The current inflationary environment is attributed to several factors, including the lingering effects of the COVID-19 pandemic, supply chain disruptions, and geopolitical developments. Specifically, disruptions in energy markets, such as those stemming from conflicts in the Middle East and Russia-Ukraine war, are highlighted as significant drivers of price increases. Critics argue that raising interest rates may not effectively address inflation driven by sustained interruptions to energy supply, as energy underpins all economic activity. The Fed's assumption that these shocks are temporary is questioned, with concerns that they could have lasting impacts on prices.

The Role of Sentiment and Consumer Behavior

The sentiment of consumers is presented as a critical, yet potentially overlooked, factor in economic performance. Historical examples, such as Japan's prolonged period of low interest rates and stagnant growth, are cited to illustrate how a lack of consumer optimism can hinder economic stimulation, even with ample liquidity. The argument is that fear and uncertainty can lead individuals to hoard savings and reduce spending, regardless of the availability of cheap credit.

Data from consumer confidence surveys, such as those from the University of Michigan and the Conference Board, are presented as evidence of this prevailing pessimism. These surveys indicate that a significant number of Americans are more afraid of rising unemployment and feel worse about their financial situations compared to a year ago, trends historically associated with recessions. This contrasts sharply with the Fed's assessment of a resilient labor market and expanding economy.

Debt, Growth, and Future Outlook

The substantial national debt, exceeding $40 trillion, presents another significant challenge. The rising cost of servicing this debt is becoming a major line item in the federal budget. The effectiveness of the Fed's current strategy is questioned in light of this debt burden and the projected growth rates. The median projections from the Summary of Economic Projections indicate real GDP growth of 2.3% this year and 2.4% next year, with total PCE inflation falling to 2.3% next year. However, some view these growth numbers as insufficient to manage the debt.

Two primary growth strategies are discussed: a Hamiltonian approach involving protectionism and reshoring manufacturing, which is expected to be costly and time-consuming in the short term, and the potential of artificial intelligence (AI) to drive productivity gains. The concern is that if AI does not deliver the anticipated growth, the economy may struggle to manage its debt, potentially leading to a devaluation of the dollar.

The Bond Market's Message

The bond market's reaction, with rising longer-term bond yields, is interpreted as a signal of distrust in the Fed's ability to control inflation. Yields on the 10-year Treasury have risen significantly, suggesting that investors are demanding higher compensation for holding debt due to concerns about economic strength, competition for capital, and geopolitical risks. The argument is made that without robust growth, the Fed's ability to manage inflation through rate hikes is limited, and the bond market is reflecting this uncertainty.

Conclusion: A Risky Decision

The Fed's decision to raise rates is characterized as a calculated bet on an uncertain economic future. While the committee maintains its commitment to price stability, critics argue that the move may backfire if it fails to account for the prevailing negative consumer sentiment, the persistent nature of supply-driven inflation, and the significant debt burden. The coming months will reveal whether the Fed's strategy effectively navigates these complex economic forces or exacerbates existing fragilities.

FOMC Rate Hike Decision and Economic Overview

The FOMC raised the federal funds rate by 0.25% to a target range of 3.75-4%, citing economic expansion and the need to support the dual mandate. The statement noted resilient domestic spending, strong productivity, and robust capital investment, with job gains keeping pace and a little change in the unemployment rate.

FOMC decided to raise the target range for the federal funds rate by a quarter of a percentage point.
The new target range is 3.75% to 4%.
This is the first rate hike since July.
The action supports the Federal Reserve's dual mandate.
Economic activity is expanding at a solid pace.
Domestic spending has been resilient, productivity growth strong, and capital investment robust.
Job gains have kept pace with the workforce, and the unemployment rate has changed little.

The Elephant in the Room: Sentiment vs. Data

A key debate revolves around whether this rate hike is the start of a sequence or a mistake. The speaker emphasizes that investor sentiment and consumer confidence, particularly among those struggling financially, are critical factors the Fed may be overlooking. Low consumer confidence, a declining labor force participation rate (when those who stopped looking are considered), and a general sense of fear about the economy are highlighted as counterpoints to the Fed's optimistic data.

The central question is whether this is the beginning of a rate hike sequence or a mistake.
Investor and consumer sentiment are crucial, especially for those on the 'wrong side of the K' (struggling financially).
Consumer confidence is low, with concerns about job security and making ends meet.
When people who have stopped looking for jobs are factored in, labor force participation data looks worse.
The Fed's policy statement may not be acknowledging the economic experiences of those less well-off.

Lessons from Japan and the Power of Sentiment

The discussion questions whether the Fed influences inflation or merely responds to it, drawing parallels to Japan's prolonged stimulatory environment without significant economic stimulation. The speaker argues that human psychology and sentiment are paramount, with fear currently outweighing optimism. This sentiment, not just data trends, drives economic decisions like spending and investment.

The debate includes whether the Fed influences inflation or responds to it.
Japan's experience of decades of stimulation without significant economic growth is cited.
Human psychology and sentiment are argued to be more critical drivers than data alone.
Fear in the system currently outweighs optimism, even among investors.
The Fed's focus on trends might be ignoring the sentiment of those negatively impacted.

Fed's View: Economic Strength and Temporary Shocks

The Fed's policy statement highlights strengthening economic markers like new hiring, private sector earnings, and business capital investment, alongside robust credit flows. The Fed views financial conditions as not restrictive and has removed 'a dose of accommodation.' Geopolitical shocks are acknowledged but seen as temporary, with the expectation that they will work their way through the system.

American economy appears to be strengthening according to the Fed.
Markers like new hiring, private sector earnings, and business capital investment have improved.
Credit flows have been robust, particularly for businesses.
Financial conditions are not considered restrictive.
A 'dose of accommodation' has been removed.
Geopolitical landscape of shocks and uncertainty is noted but viewed as temporary.

Questioning the Transience of Energy Shocks

A counterargument questions the transience of current supply shocks, particularly in energy, citing the six-month duration of Middle East disruptions, Russia's reduced diesel exports, and Saudi Arabia's cancellation of crude exports. The speaker posits that rate hikes cannot lower inflation if it's driven by sustained energy interruptions, as energy underpins all costs. The Fed's bet is that these shocks are not the primary driver of inflation.

The transience of supply shocks, especially in energy, is questioned.
Middle East disruptions have lasted six months.
Russia has reduced diesel exports, and Saudi Arabia has cancelled crude exports.
Rate hikes cannot lower inflation driven by sustained energy interruptions.
Energy prices underpin all costs in the economy.
The Fed is betting that energy shocks are not the primary driver of current inflation.

The Disconnect: Elite Optimism vs. Main Street Reality

The discussion contrasts the Fed Chair's optimistic view, potentially influenced by elite circles, with the reality faced by average individuals and Gen Z, who may not share this optimism. While investors have benefited from recent economic conditions, those living paycheck to paycheck face a different reality. The official unemployment rate of 4.1% is challenged by the argument that it doesn't account for people leaving the labor force, which is seen as a sign of weakness, not strength.

A disconnect exists between the Fed Chair's optimistic view and the sentiment of average people and Gen Z.
Investors have benefited greatly, but those living paycheck to paycheck face hardship.
The official unemployment rate of 4.1% is questioned.
People leaving the labor force are not counted in the unemployment rate, indicating weakness.
This trend is particularly concerning with young people opting out of job searches.

Risk of Deflation and Misinterpreted Economic Signals

The speaker expresses concern about the Fed's focus on inflation while ignoring the potential for deflation driven by consumers running out of money and retailers cutting prices to attract customers. This could be misinterpreted as the Fed's actions working, when in reality, it signals economic rot and a deepening recession. The reliance on savings has diminished, impacting spending and potentially leading to a recession.

Concern is raised about potential deflation driven by consumer spending drying up.
Retailers may cut prices to attract customers, masking underlying economic weakness.
This could be misinterpreted as the Fed's policies working, when it signals recession.
Consumers are running out of savings, impacting their ability to spend.
The economy's resilience was partly due to top earners and depleted savings of others.

Economic Projections and Growth Strategies

The Fed's commitment to price stability and its 2% PCE inflation objective is reiterated. Projections show real GDP rising at 2.3% this year and 2.4% next, with total PCE inflation falling to 2.3% next year. However, the speaker questions these projections, noting that AI is the primary bet for future growth, while protectionist policies might initially raise prices. A crisis-led decline in inflation due to people running out of money is a potential, but mistaken, positive signal.

Commitment to price stability and a 2% PCE inflation objective is reaffirmed.
Median projections: Real GDP at 2.3% (this year) and 2.4% (next year).
Median projections: Total PCE inflation at 3.7% (this year) and 2.3% (next year).
AI is seen as the primary driver for future economic growth.
Protectionist policies (tariffs) are expected to raise prices in the short term.
A crisis-led decline in inflation due to depleted consumer funds is a concern.

Debt Sustainability, Labor Market Data, and Bond Market Signals

The discussion delves into the sustainability of debt, with interest payments becoming the largest line item. The speaker questions how rate hikes will help refinance this debt and criticizes the Fed's focus on trends while ignoring the reality of people opting out of the labor force. The bond market's rising yields are interpreted as a lack of trust in the Fed's ability to manage inflation, driven by economic strength, competition for capital, and geopolitics.

Servicing national debt is the single biggest line item and is growing.
Concerns about refinancing this debt with high interest rates.
Criticism of the Fed for not accounting for people leaving the labor force.
Rising long-term bond yields suggest a lack of trust in the Fed's inflation control.
Reasons for rising yields include economic strength, competition for capital, and geopolitics.

Precarious Economy: The AI Bet and Debt Concerns

The current economic situation is described as precarious, with the market potentially relying on AI for growth. If AI fails to deliver, or if debt becomes unmanageable, the consequences could be catastrophic, especially since the economy isn't grounded in real wage growth for the middle class but rather speculative asset classes. The analogy of a 'wobbly ball on a high wire act' illustrates the instability.

The economy is in a precarious state, relying heavily on AI for future growth.
A failure of AI or unmanageable debt could lead to catastrophic consequences.
The economy is not grounded in real wage growth for the middle class.
It is currently supported by speculation in asset classes by the wealthy.
The situation is likened to a 'wobbly ball on a high wire act'.

Rate Hikes vs. Supply-Side Inflation and External Factors

The speaker expresses doubt about the effectiveness of small rate hikes in addressing supply-side inflation, like energy shocks from the Middle East. The Fed's mandate is to prevent relative price changes from broadening, but the speaker believes the Fed cannot control external factors like oil prices. While the Fed can curb overexuberant investor behavior, this might harm those relying on spending.

Skepticism about the effectiveness of small rate hikes for supply-side inflation (e.g., energy shocks).
The Fed's mandate is to prevent inflation from broadening, not control individual prices.
External factors like oil prices are beyond the Fed's direct control.
The Fed can curb investor exuberance, but this may negatively impact spending.

Consumer Confidence and Recessionary Sentiment

Data from polling and surveys, particularly the University of Michigan survey, shows significantly low consumer confidence, with more Americans fearing unemployment than not. This pattern historically aligns with recessions, contradicting the Fed's view of a resilient labor market. The sentiment suggests that, for many, the economy already feels like a recession, regardless of official declarations.

Polling data shows significantly low consumer confidence.
More Americans fear rising unemployment than do not.
This sentiment historically aligns with economic recessions.
It contradicts the Fed's assessment of a resilient labor market.
For many Americans, the economy feels like a recession, irrespective of official NBER declarations.

Academic vs. Experiential Economic Views

The speaker contrasts Jeff Snyder's focus on consumer spending at the ground level with the Fed Chair's potentially more academic view. While acknowledging the Fed Chair's good intentions and intelligence, the speaker feels his decisions are too heavily influenced by academic models rather than real-world, experiential data, particularly concerning labor force participation and the sentiment of those struggling.

Comparison between Jeff Snyder's focus on consumer spending and the Fed Chair's academic approach.
The Fed Chair is seen as intelligent and well-intentioned but potentially detached from real-world experience.
Decisions may be overly influenced by academic views rather than experiential data.
Key overlooked areas include labor force participation and the sentiment of struggling individuals.
The academic view might be masking real trends.

Labor Market Data, Political Blindness, and Core Economic Challenges

The speaker argues that the Fed's justification for rate hikes on the labor side is weak, as data shows rising effective unemployment not captured by official rates. Concerns are raised that policymakers might be intentionally blind to data due to political pressures. The core issues remain refinancing massive debt and the energy crisis potentially rendering Fed rate hikes ineffective.

Justification for rate hikes based on the labor market is questioned.
Effective unemployment is rising but not captured by official rates.
Concern that policymakers may be intentionally ignoring data due to political jobs.
Key issues: refinancing massive debt and the energy crisis.
The energy crisis may make Fed rate hikes ineffective.

Growth Strategies, Debt Management, and AI's Role

The speaker outlines two potential growth strategies: Trump's protectionist 'Hamiltonian' approach (tariffs, bringing manufacturing back) which could raise prices short-term, and reliance on AI for growth. If AI growth is slower than expected, the US might struggle to manage its debt, potentially accelerating the shift away from the dollar. The current rate hike is seen as a risky move, but the Fed Chair's lack of forward guidance allows for potential backtracking.

Two growth strategies discussed: protectionism (tariffs, reshoring) and AI.
Protectionism may increase prices in the short term.
Slower-than-expected AI growth could hinder debt management.
This could accelerate the global shift away from the dollar.
The current rate hike is considered a risky move.
The Fed Chair's lack of forward guidance allows flexibility.

Bond Market Distrust, Economic Instability, and Debt Management Strategies

The bond market's rising yields (10-year Treasury nearing 5.02%) reflect a lack of trust in the Fed's ability to control inflation, especially without sufficient economic growth. The current economy is seen as unstable, propped up by asset speculation rather than real wage growth. If AI doesn't provide the expected growth, or if debt becomes unmanageable, the situation could become 'cataclysmic.' Financial repression (keeping interest rates lower than inflation) is discussed as a historical method to manage debt, but requires real economic growth.

Rising 10-year Treasury yields (near 5.02%) indicate a lack of trust in the Fed's inflation control.
The current economy is unstable, relying on asset speculation, not real wage growth.
Failure of AI or unmanageable debt could lead to a 'cataclysmic' situation.
Financial repression (interest rates < inflation) can manage debt but requires real economic growth.
Without growth, artificially low rates lead to an upward spiral of yields.

Alternative Monetary Policy Stance and Potential Misinterpretations

The speaker would have held or cut rates, not raised them, given the assumption that the 'bottom of the K' (struggling individuals) won't benefit, the oil disruption isn't temporary, and persistent inflation cannot be controlled by rate hikes. The complexity of the situation makes judgment difficult, with potential for rate hikes to be perceived as working if inflation falls due to a crisis-led decline, rather than Fed policy.

Speaker would have held or cut rates, not raised them.
Assumptions: struggling individuals won't benefit, oil disruption is not temporary, persistent inflation is uncontrollable by rate hikes.
The situation is complex and difficult to judge.
A crisis-led decline in inflation could be mistakenly attributed to Fed policy.
The Fed's actions might not be the cause of any future inflation decrease.

Fed's Mandate Limitations and Core Economic Challenges

The Fed's role is to ensure relative price changes don't broaden, not to control individual prices like oil. However, the speaker argues the Fed cannot achieve this if inflation is driven by external supply shocks. While the Fed can temper investor exuberance, this might negatively impact those reliant on spending. The core challenge remains the energy crisis and the massive debt burden, which rate hikes may not effectively address.

Fed's role: prevent inflation broadening, not control individual prices (e.g., oil).
Speaker argues Fed cannot control inflation driven by external supply shocks.
Fed can curb investor exuberance, potentially hurting those dependent on spending.
Key challenges: energy crisis and massive debt burden.
Rate hikes may not effectively address these core issues.

Detachment from Reality and the Primacy of Sentiment

The speaker highlights that the Fed is 'lost in the top of the K,' lacking experiential contact with the struggles of average Americans. Consumer confidence is critically low, mirroring recessionary periods, and this sentiment, not just official data, drives the economy. Japan's experience shows that even with cheap money, fear of bubbles can prevent investment, underscoring the importance of sentiment over readily available capital.

The Fed is perceived as detached from the struggles of average Americans ('top of the K').
Consumer confidence is critically low, historically aligning with recessions.
Economic reality is driven by sentiment, not just official data.
Japan's experience shows fear of bubbles can deter investment despite cheap money.
Sentiment is a more crucial driver than the availability of capital.

Intentional Blindness, Debt, Energy Crisis, and Future Growth Bets

The speaker believes the Fed is intentionally blind to data, possibly due to political jobs. The core issues are refinancing enormous debt and the energy crisis, which rate hikes may not solve. The current situation is precarious, with consumers running out of savings and facing a prolonged energy shock. Trump's strategies (protectionism, AI) are long-term, and if AI falters, debt could spiral, accelerating the move away from the dollar.

Concern that the Fed may be intentionally ignoring data due to political pressures.
Key challenges: refinancing massive debt and the energy crisis.
Rate hikes may not solve these fundamental issues.
Consumers are running out of savings, facing a prolonged energy shock.
Trump's strategies (protectionism, AI) are long-term; AI's success is crucial for debt management.
Failure of AI could accelerate the shift away from the dollar.

The Risk of Crisis-Driven Deflation and Policy Misinterpretation

The speaker fears that a deflationary trend might emerge not from successful policy, but from consumers running out of money, forcing stores to cut prices. This could be misinterpreted by the Fed as their actions working. The current economic climate is difficult, with inflation being real, but the speaker understands the impulse to act. The ultimate outcome remains uncertain.

Fear of deflation arising from consumers running out of money, not successful policy.
Stores cutting prices to attract customers could be misinterpreted as policy success.
The current economic climate is difficult and inflation is real.
The impulse to act (raise rates) is understandable.
The ultimate outcome of the Fed's actions is uncertain.