The U.S. Federal Reserve has been cutting interest rates throughout 2025, bringing them down from 5.50% to 3.75%. Now they're saying they want to hold rates steady for a while. Sounds reasonable, right?

Here's the problem. Based on what we're seeing in the data, inflation is going to start climbing again. And sometime in the next few months, we expect inflation to actually rise above the interest rate the Fed has set. When that happens, we have what I call "upside down" rates. In other words, the interest rate becomes lower than inflation, which means the Fed is essentially making money cheaper even as prices are rising.

You might be wondering why inflation would suddenly pick up again. A big part of it comes down to oil. The concerns about the disruptions in the Strait of Hormuz, which is a narrow waterway where about one fifth of the world's oil passes through every day. If that continues to be blocked or restricted, oil prices can keep climbing. And when oil prices go up, everything else follows because it costs more to transport goods, manufacture products, and keep the lights on.

Think back to 2022 and 2023 when the Fed was aggressively raising rates to fight inflation. They worked hard to get prices under control. But if they hold rates at 3.75% while inflation climbs past that level, they risk undoing all that progress. Prices could start spiraling upward again.

So what can the Fed do? They could start raising rates again, but actually, that could push the economy into a fiscal crisis this time. Or they could keep rates where they are and hope inflation doesn't get out of control. Neither option is great.

Now, you might be thinking: if inflation rises above the Fed Funds rate in 2026, won't the Fed just raise rates to fight it? That's what they're supposed to do, right? That's what every economics textbook says.

Here's why I don't think they can. And it all comes down to one number: $39 trillion.

That's the current U.S. government debt. It's a number so large it's hard to comprehend. But let me make it real for you. The government is currently spending about $1.2 trillion per year just on interest payments. That's already more than the entire defense budget, which runs around $1.17 trillion. Think about that. America now spends more paying interest on its debt than it spends on its military, veterans benefits, or any other single budget item.

Now here's where the math gets really ugly. Every time the Fed raises interest rates by just 1%, the government's annual interest bill goes up by roughly $390 billion. That's because most government debt eventually needs to be refinanced at whatever the prevailing interest rate is.

Let's say the Fed decided to get serious about fighting inflation and raised rates from 3.75% back up to 5.75%. That's a 2% increase. On $39 trillion of debt, you're looking at an additional $780 billion in annual interest costs instantly! Where does that money come from? You either cut spending dramatically, raise taxes significantly, or borrow even more money, which just makes the problem worse.

The federal government is already running massive deficits. They're already spending way more than they collect in taxes. There's simply no room in the budget to absorb hundreds of billions in additional interest payments. It would trigger a fiscal crisis.

This is what I call the debt trap. The Fed can't raise rates without breaking the government's budget. But if they don't raise rates and inflation keeps climbing, they lose control of prices. They're stuck.

And here's my view: when central banks are faced with a choice between fighting inflation and protecting the government's ability to function, they choose the government every time. They have to. A government that can't pay its bills is an existential crisis. High inflation is painful, but it's not existential.

So what does the Fed do? My strong belief is that they hold rates where they are, or potentially even cut them further if economic conditions give them any excuse to do so. They'll talk about "monitoring the data" and "remaining patient" and "being data dependent." But underneath it all, they know they can't raise rates meaningfully without creating a bigger crisis.

This means we're likely heading into a prolonged period of negative real rates. Interest rates staying below inflation. Money staying cheap even as prices rise. It's not a coincidence. It's a policy choice forced by the debt burden.

If I'm right, and the Fed holds or lowers rates while inflation climbs, we're in what's called financial repression. The government is essentially inflating away its debt burden at the expense of savers and fixed income investors.

Our cash loses purchasing power. Government bonds deliver negative real returns. The traditional safe havens stop being safe. This isn't some abstract economic theory. This is your retirement savings, your children's education funds, your wealth preservation strategy getting quietly eroded.

But it also creates opportunities. In a financial repression environment, certain assets do very well. Assets that can't be printed. Assets with pricing power. Assets that benefit from cheap money and rising nominal prices. The key is knowing which is which and how to position accordingly.

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Sincerely,