The Fed Flips to Inflation
QT was the Last Man Standing on Inflation
The Federal Reserve just turned inflationary.
If you like your inflation you can keep your inflation -- in fact you’ll love what comes next.
On October 29th the Fed quietly announced they’re ending the main program fighting inflation, called Quantitative Tightening or QT.
This matters because QT -- which involves selling trillions in Fed assets and cancelling the dollars -- was the main tool the Fed was using to keep a lid on inflation.
Now it’s over.
Meaning the Fed’s about to return to its traditional purpose: Creating inflation.
How the Fed Creates Inflation
So the Fed has two main ways to create inflation.
The traditional way is interest rates: They artificially lower rates so banks make lots of cheap loans -- the banks literally printing the money.
This is why when you get a mortgage the bank wants you to open an account. You might think I don’t want an account, I want a loan. But the reason is the bank effectively printed the money.
The new money then dilutes existing dollars just like a basement counterfeiter.
Prices go up.
But the Fed started a second way to inflate in the 2008 crisis where the Fed literally types a bunch of zeros on a spreadsheet, calls them dollars, and uses them to buy everything in sight — principally Treasuries and Mortgage-Backed Securities from banks.
Called quantitative easing -- QE -- this is fun because it bails out Wall Street, stimulates the economy into a tissue-fire, and does it fast.
In fact, QE is the basement counterfeiter on turbo: In 2008 they printed over a trillion dollars in just 2 months.
During Covid they QE’d almost $3 trillion in 2 months before going on to QE a cool $5 trillion.
That was fully one third of all dollars in existence — called M2. And it sent inflation soaring at the fastest pace since the 1970’s.
How QT Ended Bidenflation
Bidenflation scared the Fed straight, so they jacked interest rates to choke off loans and flipped to tightening -- selling everything in sight and cancelling the dollars.
They started with a whopping 95 billion a month. Which broke Bidenflation, taking official CPI from 8%-plus to just over 3%.
At that point they backed off because the sales were hurting Wall Street, who owns the stuff they were selling.
So the Fed dropped QT to 60 billion a month by the time Biden left office. Then 40 billion this April. And, now, zero.
The problem is Congress hasn’t cut spending to rein in inflation -- it actually increased.
Meaning Congress did nothing but now the Fed’s taking away the main thing holding down inflation. And they’re doing it while cutting interest rates -- which also makes inflation go up.
All while Congress parties on and Trump brokers trillions of investment for re-shoring production and the ever-popular AI data centers.
Trillions of investment is super for jobs. But also bid up prices.
So it’s the perfect inflation storm. And the Fed just tapped out.
What’s Next
Now, we’re not going back to 8% inflation -- that would take another Covid-level printing orgy. But inflation could pop back into the 3’s by midterms.
When voters get to tell Congress what they think about it.
The easy way to cut inflation is cut federal spending and regulatory red tape so the money shrinks and production -- and competition -- grows.
Given Congress isn’t doing any of this, the hope was at least the Fed keeps QT going to drain the extra inflation.
That ship has now sailed.
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