Imagine for a moment that I’m extremely ill. I go to the doctor, and he prescribes a medication to treat my ailment.
Great, right?
However, the doctor forgets to ask if I’m taking any other medication. I am, and I have a drug interaction and die.
Not so great, right?
In this scenario, doing the right thing was the wrong thing because the doctor ignored an important factor.
I think the central bankers at the Federal Reserve are heading down a similar path.
Last week, several Fed members signaled the central bank may have to raise interest rates to cool price inflation.
In practice, the Fed members are using “open mouth” operations, laying the groundwork for a possible rate hike in the future. Central bankers don’t like to surprise markets, so they typically signal future moves in speeches and interviews. However, one often has to read between the lines because central bankers also like to frame things in a way that leaves plenty of wiggle room for other alternatives.
Michelle Bowman is typically a more dovish Fed member, but even she expressed concern about inflation during a conference in Iceland and said the war could change her view on the trajectory of interest rates.
"It still seems early to assess the size and persistence of the economic effects from the Iran conflict. However, should disruptions persist well into the second half of the year, we could start to see broader effects on inflation."
She went on to say that she was becoming more likely to "consider shifting my approach to thinking about the balance of risks," hinting she might support a rate hike.
Minneapolis Fed President Neel Kashkari also hinted at a willingness to hike.
“I think it is premature for me to conclude we need to be raising rates right away, but it makes me further pay attention to the risk that inflation could continue to climb and inflation expectations could become unanchored.”
Philadelphia Fed President Anna Paulson said she thinks current monetary policy is in the right place. However, the central bank is “ready to react.”
“I think it is healthy that market participants have taken on board scenarios where the funds rate remains unchanged for an extended period, as well as scenarios where further tightening becomes necessary."
In a recent interview on Fox Business, San Francisco Fed President Mary Daly said, "Policy is in a good case," but hinted that she could be convinced to support a rate hike in the future.
"[If inflation] starts to drift up because the conflict is persistent, well, then that would change my mind on the outlook for the economy in terms of inflation."
Kansas City Fed President Jeffrey Schmid was more direct, saying his "primary concern is inflation, which is too hot and has been above target for too long." He went on to say that the strategy of looking through an energy shock as something that won't have a lasting impact is not viable.
"We're not very restrictive at this stage, and I think there's some dialogue that ... we need to start considering what tools we have to really make it a little bit more restrictive. Maybe we look at the balance sheet again as another tool to ... create some restriction."
The messaging pattern is clear. Rates are staying where they are for now, but the next move is more likely up than down. That's the expectation the central bankers seem to be setting.
Markets are listening, with odds reflecting that the Fed's next move will be a rate hike, likely before the end of the year.
Higher Rates: The Right Medicine at the Wrong Time
The Fed people aren’t wrong about the inflationary pressure. CPI spiked to 3.8 percent in April. However, this is just a symptom of the real inflation problem. We see that in the increase in the money supply (Keep in mind, inflation, properly defined, is an increase in the amount of money and credit. Price inflation is a symptom of this monetary inflation). In fact, the Fed’s balance sheet is currently increasing, indicating the central bank is running quantitative easing (QE) operations and injecting more money into the economy.
So, the central bankers at the Fed can easily justify a rate hike (along with balance sheet reduction). It’s the right medicine for an economy suffering from an inflationary fever. In fact, I would argue the Federal Reserve never did enough to slay the inflation dragon. It should have hiked more aggressively months ago.
Now they're worried about a revival of inflation, but the doctors at the Federal Reserve are ignoring a complicating factor – the Debt Black Hole.
It’s easy to say, “We’ll raise rates to fight inflation.” It’s something else altogether to say, “We’ll raise rates to fight inflation,” when the economy is up to its eyeballs in debt.
Debt-riddled economies don’t function in higher interest rate environments. It won’t take much to pop the debt bubble, and the central bankers at the Fed and the markets speculating about their next move seem to be ignoring this vital piece of the puzzle.
The cost of servicing the national debt is just one problem facing the Fed as it contemplates the future of interest rates.
April interest payments pushed total interest expense to $734.2 billion through the first seven months of fiscal 2026. That was up 7.3 percent compared to the same period in fiscal ’25.
Interest on the national debt set a record last year, costing $1.2 trillion. That was up 7.3 percent over 2024.
Through the first half of the current fiscal year, the federal government spent more on interest on the debt than it did on national defense ($558 billion) or Medicare ($590 billion). The only higher spending category is Social Security ($957 billion).
On top of that, American consumers are buried under record levels of debt, and corporations are leveraged to the hilt.
If the Federal Reserve follows through and hikes rates, or even if it simply holds rates higher for longer, it runs the risk of collapsing an economy that is addicted to easy money.
As I have said over and over again, the Fed is in a Catch-22. So, what they say isn’t relevant. The central bankers are limited in what they can do by the massive Debt Black Hole dominating society. They can inject the rate hike medicine and hope it doesn’t interact with the Debt Black Hole and hope it doesn’t kill the economy, or they can feed the Debt Black Hole with lower rates (and more inflation).
Conventional wisdom holds that higher rates will be bearish for gold. This is putting strong downward pressure on the yellow metal. But there is no guarantee that they will really be able to cut. And if they do, there is a high likelihood it will precipitate a recession and/or a financial crisis.
So, what's a Fed member to do?
Talk about how policy is in the right place and crack the door open for a rate hike, apparently. But ultimately, they will have to choose. Will they give the rate-hike medicine and hope the interaction with the Debt Black Hole doesn't kill the economy? Or do they forgo the medicine and pray inflation doesn't kill it?
There is no good choice here. But historically, when push comes to shove, the Fed picks inflation.
The Debt Black Hole is just one dynamic that mainstream pundits are missing in their narrative surrounding gold. (The other is real interest rates.) That’s why you might be wise to stop and think hard about following the herd and selling your gold.
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