Investment Banking and Private Equity:
Secure your full time offer TODAY

Whether you’re preparing to crush your first day on the desk — or just trying to land the job — our exclusive 17 hour course equips you with the technical toolkit demanded by top investment banking and private equity firms.

Learn EVERYTHING taught in new hire training (and more), from Excel to Accounting to Valuation to M&A and LBO modeling — with hands-on, real-world applications.

All-In Rebuttal: Should we have a monetary solution to a fiscal problem?

This past week, I listened to an episode of the “All-In” podcast that left me puzzled. 

Specifically, I was perplexed by the hosts’ assertions that U.S. growth is tracking above expectations, inflation is moderating…and yet, the Fed should be cutting rates.

In a conversation about the budget deficit, the hosts first said:

David Sacks: “What we’re seeing is good economic news is breaking out all over. So, Q2 GDP is on track for 3.8%, according to the Atlanta Fed. The May jobs report was above expected…inflation down to 2.4%. So, growth is back, inflation is low…”

Translation: growth is strong, unemployment is low, and inflation, as measured by the key statistics the Fed watches, is not out of control.

Yet, the hosts went on to argue that the Fed should be cutting rates. Why? To reduce the budget deficit.  

Chamath Palihapitiya: “If [the Fed] cuts by 100 basis points, that’s another $300bn [of savings for the Treasury]…that’s not money we get in, but it’s money we don’t have to spend….we have to figure out how to get Jerome Powell on the side of America versus on the side of what could happen politically…there’s probably a version where he says ‘my gosh, if I do this, it helps Trump, and if I don’t do it, it hurts Trump.’ Practically, that is true, but the reality is, the conditions on the ground justify cutting. ”

Jason Calacanis:  “Your claim, I just want to be clear here, is that Powell is playing politics, not working towards the dual mandate, which is very clear: [inflation] at the 2.0 rate and full employment. Your belief is that he’s playing politics, yes?”

Chamath Palihapitiya: “I believe that these decisions are political. I think that the Federal Reserve has veered away from actually controlling the money supply in the best long-term interest of the United States, and more towards what benefits the short term.”

Translation: The Fed needs to cut rates now. Why? So that the short term debt issued by the U.S. government will be at a lower borrowing cost than what we currently pay, thereby reducing the deficit. The hosts are arguing that the Fed is refusing to cut interest rates out of political spite.

Put simply, they are advocating for a monetary solution to a fiscal problem.

Respectfully, I disagree. 

While I can’t speak to the specific motivations of individuals within the Federal Reserve, I can speak to what is — and isn’t — the Fed’s job.

It is their job to effect monetary policy to encourage maximum employment and stable prices.

It is not their job to set fiscal policy, reduce government spending, or address the Federal budget.

It’s hard to argue that growth and employment are stronger than expected and in the same breath claim that the Fed needs to urgently cut rates.

When the Fed acted in response to the Global Financial Crisis and COVID and rates WERE at zero, the Treasury was able to borrow at reduced rates.

But Treasury officials at the time (“TBAC”, which stands for the Treasury Borrowing Advisory Committee) failed to “term out” our debt: meaning, they didn’t sufficiently rebalance their borrowing towards longer maturities (10, 20, and 30 years) vs. shorter maturities (t-bills, 2s, 3s, 5s, and 7s). 

So as those short dated borrowings mature, the Treasury has to refinance at higher rates, increasing borrowing costs. 

I have argued in the past that failing to term out our debt when rates were low was a serious oversight.

Granted, this is easier said than done. Perhaps we overlearned the lessons of Japan. Perhaps a decade of easy monetary policy created a false sense of security – a kind of “rates will be low forever!” mentality.  Whatever the reason, it was a mistake not to rebalance into more longer dated Treasury issuance at lower rates.

The way to correct this mistake is not, I would argue, to now cut rates in a time where — by the hosts’ own admission — growth and employment are strong, and the material impacts of tariffs remain unknown.

Said differently, it’s not the job of the Federal Reserve to solve the budget deficit problem, just like it’s not their job to make your credit card, mortgage payments, or your student loans more affordable.

Moreover, the dollar is already down +/- 10% this year with rates unchanged and only two cuts priced in for the year. Is additional currency weakness (which would likely follow on the heels of a rate cut) really in the country’s best interest?

Central bank independence is structurally critical to the function of a strong economy and government. If you need any further proof, we’ve shared the story behind one hedge fund breaking the Bank of England here:

On Wednesday, the Fed left rates unchanged, citing massive uncertainty in both the growth and inflation outlook.

I would argue that the Fed is acting with restraint in the long term interest of America. The surprise move to cut 50bps last fall was the mistake — in my opinion — and not supported by the data at the time. 

It seems in a time of very real uncertainty, they are holding onto as many chips as they can, and looking for incontrovertible evidence that they need to act before moving.