On December 13, 2023 the Fed U-turned from a staunch inflation fighting policy stance two weeks prior to signaling that it was preparing for rate cuts.
This raised the question of what could have changed in two weeks to cause such a reversal.
If we look at key metrics such as M2 Money, the Consumer Price Index (CPI), and the Gross Domestic Product (GDP) of the US economy, these measures were signaling increasing price inflation pressure and relaxing conditions according to the prevailing economic worldview.
To be sure, the US economy with $97 Trillion of total system debt cannot sustain the burden imposed by the Fed of a 5.5% shock interest rate increase over the past 1.75 years. That’s more than $5T per annum of increased interest payments as interest rates reset throughout the economy if the 5.5% rate is maintained.
And while manufacturing did signal a down-turn in most recent monthly data, this alone would not have been sufficient to drive such a dramatic policy reversal by the Fed.
