The Fed’s rate cuts have already failed to work in terms of employment and economic forecasts, which suggests that the Fed is not thinking about employment or recession. The monthly employment data is almost made up and is known to all but a few people, while recessions are based on their official announcements with a lag of 11 to 13 months.

Therefore, we need to find the answer from a deeper level: what is the purpose of the Fed maintaining high interest rates? What are the factors that can really influence the Fed to cut interest rates?

Since 2008, the United States has started a debt-driven economic growth model, and periodic economic crises are inevitable. In particular, since 2020, the ultra-large-scale quantitative easing policy has been printing money without a bottom line, releasing a huge amount of liquidity far exceeding market demand, which is the root cause of inflation. Can the Fed really effectively curb inflation by raising interest rates and shrinking its balance sheet? Obviously not. On the surface, this round of interest rate hikes has suppressed US inflation from nearly double digits to below 3%, which seems to be close to success.

However, the interest rate hike did not eliminate liquidity. On the contrary, high interest rates have generated a large amount of capital gains. If these additional gains flow into the market, the consequences will be disastrous. If the excess money is not evaporated, inflation will never be able to truly fall.

The inversion of long-term and short-term bond yields caused by interest rate hikes, especially for short-term bonds, what does a risk-free return of more than 5% mean? Just deposit money in a bank or buy a 3-month short-term US bond to get a risk-free 5% return? What other investment activities can achieve this? Not only Americans, but also people who hold US dollars around the world, as long as they are not stupid, know to buy US bonds. The interest rate hike suppresses the global supply side, driving capital to the equity market rather than production activities.

However, the consumption side of the United States, which is driven by high risk-free returns, benefits instead. All those who hold US dollars enjoy a 5% risk-free return. In this case, the downward trend in inflation is only temporary. Once the Fed starts to cut interest rates, inflation will surely come back and be more fierce than in 2020. Combined with the inventory cycle in the United States, China and the world, can you imagine what this means for commodities?

There are two most effective ways to curb inflation:
First, it raises the price of US dollar assets, absorbs excess liquidity, and causes the funds of these buyers to evaporate quickly as the assets fall.

Second, experience a deep economic recession and re-price labor and means of production.