Will The Federal Reserve Cause A Government Induced Recession?

The Fed May Be Tinkering on the Edge of a Cliff

I think the Federal Reserve made the wrong decision.

Not because inflation doesn’t matter. It does.

But because I believe the Fed is looking at an economy that is still growing, productivity is improving, businesses are investing heavily, and consumers are spending — and is choosing to put its foot harder on the economic brakes.

That is a dangerous game.

On September 16, the Federal Reserve raised its benchmark interest-rate target by another 25 basis points, bringing the federal funds target range to 3.75%–4.00%. The Fed said economic activity was expanding at a solid pace, productivity growth was strong, capital investment was robust and job gains had kept pace with the workforce.

That is exactly why I think we need to have a bigger conversation about where monetary policy is headed.

What If This Isn’t Stagflation?

There is a popular narrative right now that the economy is moving toward stagflation — slow growth combined with persistent inflation.

I see it differently.

I think we’re dealing with what I would call “good growth-flation.”

There is still inflation, but there is also something extremely important happening underneath the surface: economic growth and productivity are improving.

Artificial intelligence and automation are driving enormous investment. Companies are finding ways to produce more with fewer resources. Businesses are spending money on technology, infrastructure and productivity-enhancing capital.

The Fed itself acknowledged that productivity growth is strong and capital investment is robust.

That’s a very different environment from an economy where inflation is simply being driven by an overheating consumer and an economy running completely out of control.

The distinction matters.

Because if productivity is increasing the economy’s productive capacity, monetary policy needs to be careful not to treat every source of inflation as if it were purely demand-driven.

The Problem With Fighting Growth Too Aggressively

The Federal Reserve has a difficult job.

Its mandate requires it to pursue both price stability and maximum employment. When inflation is above its 2% target, policymakers have a legitimate reason to be concerned.

But monetary policy operates with a lag.

That is what makes this so tricky.

When the Fed raises interest rates today, the full economic impact doesn’t necessarily show up tomorrow. It can take months for higher borrowing costs to work their way through mortgages, business investment, hiring decisions, construction and consumer spending.

That’s why I worry about the Fed continuing down this road.

The danger isn’t necessarily that one 25-basis-point hike suddenly crashes the economy.

The danger is policy becoming too restrictive for too long.

You don’t want to find out you’ve gone too far after the damage has already been done.

Liquidity Matters

Interest rates aren’t the only piece of the puzzle.

Liquidity matters too.

The Fed’s current operating framework is focused on maintaining “ample reserves” in the banking system, and its September implementation guidance says it can purchase Treasury bills and, if necessary, other shorter-term Treasury securities to maintain an ample level of reserves.

That is important because financial conditions can tighten through multiple channels.

Higher interest rates increase the cost of capital.

A less accommodative liquidity environment can make financing more difficult.

Banks become more cautious.

Businesses become more selective with investment.

Consumers become more sensitive to borrowing costs.

Eventually, all of those decisions can start feeding back into economic growth.

And that’s where I think the Fed needs to be extremely careful.

You Can Slow an Economy Too Much

The goal shouldn’t simply be to crush inflation.

The goal should be to create an environment where inflation moves toward a sustainable level without unnecessarily destroying economic growth.

Those are two different things.

Imagine you’re driving a car toward a curve.

You know you need to slow down.

So you tap the brakes.

Then you tap them again.

Then again.

At some point, the question isn’t whether braking is necessary.

The question is whether you’re still braking after you’ve already slowed down enough.

That’s the risk I see with the Fed.

We’re potentially tinkering on the edge of a cliff.

If policymakers continue raising rates and tightening financial conditions while the economy is still generating meaningful productivity gains, there is a possibility that they eventually slow economic activity too much.

And that’s how a “good” growth-flation environment can potentially turn into something much worse.

From Growth-Flation to Recession

This is the part investors need to think about.

If the Fed is successful in slowing demand without crushing supply-side growth, perhaps inflation gradually moves lower while the economy continues expanding.

That’s the soft landing everyone wants.

But there is another possibility.

The Fed keeps tightening.

Borrowing costs remain elevated.

Investment slows.

Housing becomes less affordable.

Businesses pull back on expansion.

Hiring weakens.

Consumers become more cautious.

Liquidity tightens.

And eventually, the economy crosses a line where slowing inflation isn’t the only thing happening.

Economic growth starts slowing materially.

That’s when you can go from growth-flation to stagflation — or ultimately into recession.

And once the economy is in recession, the Fed may find itself having to reverse course.

That is the irony of overly aggressive monetary policy.

The policy designed to prevent an economic problem can eventually become part of the problem.

What This Means for Investors

This is also why I don’t think investors should make decisions based solely on whether the Fed is raising or lowering rates.

You have to look at the entire economic picture.

What’s happening with productivity?

What’s happening with business investment?

What’s happening with employment?

What’s happening with inflation?

What’s happening with liquidity?

And perhaps most importantly:

Is the economy fundamentally getting stronger or weaker?

Right now, I see an economy with some very real inflation problems — but also some very real sources of economic strength.

The Fed’s own September projections still call for 2.3% real GDP growth in 2026 and unemployment around 4.1%, while policymakers expect inflation to remain elevated before gradually moving closer to their 2% objective.

That’s not an economy that looks like it’s falling apart.

Which is exactly why I think the Fed should be careful about trying to force it to slow down.

Don’t Fight the Economy — Understand It

I don’t pretend to know exactly where inflation will be six months from now.

Nobody does.

And I certainly don’t think the Federal Reserve has an easy job.

But I do think there is a major difference between an economy that needs to be restrained and an economy that is undergoing a significant productivity transformation.

Artificial intelligence, automation, infrastructure investment and technological innovation could fundamentally change how much the economy can produce.

If that is happening, we shouldn’t automatically assume that every bit of inflation requires more economic pain to eliminate.

Sometimes the biggest risk isn’t doing too little.

Sometimes it’s doing too much.

That’s why I believe the Fed’s latest decision could ultimately prove to be a mistake.

The Fed may believe it is simply taking the punch bowl away.

But if it keeps raising rates and removing liquidity while the economy is still growing and productivity is accelerating, it could eventually discover that it didn’t just slow the party down.

It stopped the party.

And by the time the economic data clearly shows that, it may already be too late to avoid the recession the policy was supposed to prevent.

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Colin Symons, CIO Lloyd Financial Group

The FOMC raised rates 25bps, as expected. Stocks were up into the event, held up OK for the event, but fell sharply towards the end of the presser, bouncing back some in the final minutes. We continue to bounce this morning.

Retail Sales were hot, at 1.2% m/m vs. exp. 0.8%. Core Sales were 1.2% m/m vs. exp. 0.4%. Control Group sales, used in GDP, were also hot, at 1.4% m/m vs. exp. 0.5%. Strong all around, and last month was also revised up.

Import Prices were up 0.7% m/m vs. exp 0.5%, while prices ex-petroleum were 0.8% vs. exp. 0.3%.

Oil was down -3% on word that Saudi Arabia could have its pipeline running at half capacity in days. Trump also made a deal with the Houthis to not attack them if they leave the Bab el-Mandeb open to shipping.

Generac (GNRC) is up 35% after entering into a deal with AMZN for backup power generators.

Building Permits, Jobless Claims, and Philly Fed Manufacturing today.

Bottom line: The day after the FOMC is seeing more calm.

Click here to schedule a meeting — I’m here to help you take the next step toward financial freedom.

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