The Fed’s Rate Hike Trap: Fight Inflation or Worsen the Debt?

The Federal Reserve is confronting a problem with no obvious painless solution.

In Episode 304 of The Secret War on Cash, Dean Heskin and Chris Agelastos of Swiss America Trading examine expectations for another Federal Reserve interest-rate increase and the conflicting economic pressures behind the decision.

Higher interest rates are one of the traditional tools central banks use to slow inflation. By making borrowing more expensive, policymakers can reduce demand and potentially ease upward price pressure.

But America’s current fiscal situation makes that strategy considerably more complicated.

With an enormous national debt, higher rates can increase the federal government’s borrowing and debt-service costs. Consumers and businesses also feel the effects through mortgages, auto loans, credit and financing.

The hosts discuss President Donald Trump’s opposition to higher rates and the possibility that Federal Reserve Chair Kevin Warsh could face some of the same political tension experienced by his predecessor, Jerome Powell.

Energy creates another obstacle.

Dean and Chris discuss oil above $100 per barrel and sharply elevated gasoline and diesel prices. Because diesel is essential to trucking and transportation, those fuel costs can spread throughout the supply chain.

That raises a difficult question: how much can higher interest rates accomplish when part of the inflation problem is being driven by geopolitical conflict and energy shortages?

Lowering or holding rates presents its own risk. Easier money can support economic activity, but it may also prolong or intensify inflation.

The result is the monetary-policy catch-22 at the center of this episode:

Raise rates, and debt becomes more expensive.