We had the September inflation report this morning (CPI).

Investor’s Business Daily said it was “hot” and a “gut-check for the Fed,” implying it will test their resolve on the policy path (i.e. perhaps dial back on rate cut expectations). 

So, what was the number? 

It was 2.4%. 

As you can see in the chart below, it’s the lowest since February of 2021, continuing the clear trend lower.  That’s good. 

And if we look at the real interest rate (inflation adjusted), it remains near the highs of this recent tightening cycle.  This means the Fed is still putting significant downward pressure on the economy — highly restrictive policy, even with the recent 50 basis point rate cut. 

But if interest rate policy is still historically very restrictive, which gives the Fed plenty of room to cut rates, why did famed macro investor Stanley Druckenmiller and former Treasury Secretary Larry Summers both criticize the Fed last week for the large rate cut?

Druckenmiller, in fact, argued the Fed’s policy wasn’t restrictive.  And that would imply no rate cuts needed.   

He said GDP is running “above trend” around 3%, corporate profits are strong, equities are at all-time highs, credit spreads are tight and gold is on highs.

Things are good.  Why cut? 

Why?  Because we shouldn’t be satisfied with a 3% economy, after we’ve expanded money supply by 40% and continue to run crisis-level budget deficits. 

The potential output for the economy should be much better than 3% real growth.  More importantly, much better than 5% nominal growth.

Remember, the government debt has doubled, relative to the size of the economy since the Great Financial Crisis.

We are at Great Depression/World War II level debt.

The only solution is to inflate the debt away. 

That has to come through hot nominal growth.

Instead, the Fed has held down the economy with highly restrictive policy. 

Still, the economy has mustered 3% real growth.  That’s “average” in average times.  Dumping $6 trillion onto the economy and running crisis-level deficits aren’t average/normal.  We should be getting a much bigger bang for our buck.  The level of real rates is evidence.

What is “hot nominal growth?”  The last time we had this level of debt, (chart above), the economy grew at an average nominal rate of 19% (in the early 1940s).