(Mises)—The Federal Reserve’s Federal Open Market Committee (FOMC) on Wednesday left the target policy interest rate (the federal funds rate) unchanged at 5.5 percent. This “pause” in the target rate suggests the FOMC believes it has raised the target rate high enough to rein in price inflation which has run well above the Fed’s arbitrary two-percent inflation target since mid-2021.
The press release from the FOMC was largely unchanged from previous recent meetings and contained the usual language about the state of the economy and the Fed’s ability to manage it:
Recent indicators suggest that economic activity has been expanding at a solid pace. Job gains have slowed in recent months but remain strong, and the unemployment rate has remained low. Inflation remains elevated. … The U.S. banking system is sound and resilient. … the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in its previously announced plans.
This rosy and orderly picture of the situation relies on cherry-picking which indicators on which to base an assessment of the overall economy, and in his post-meeting press conference, Fed Chair Jerome Powell repeated the usual stock language the committee routinely provides on how present high labor demand proves there is no economic turbulence on the horizon. This reliance on current jobs data deliberately hides a larger and more accurate assessment of the economy. Nonetheless, in his comments at the press conference, Powell stated some undeniable facts:
Inflation remains well above our longer-run goal of 2 percent—4 percent over the 12 months ending in August—and that, excluding the volatile food and energy categories, core PCE prices rose 3.9 percent. Inflation has moderated somewhat since the middle of last year … Nevertheless, the progress—the process of getting inflation sustainably down to 2 percent has a long way to go.
This meeting of the FOMC was described as “hawkish” by Wall Street observers and pundits, mainly because the FOMC’s Summary of Economic Projections (SEP) suggested that the target inflation rate will remain at 5.5 percent—or even slightly higher—throughout the rest of the year. As Powell noted:
If the economy evolves as projected the median participant projects that the appropriate level of the federal-funds rate will be 5.6 percent at the end of this year, 5.1 percent at the end of 2024, and 3.9 percent at the end of 2025. Compared with our June Summary of Economic Projections, the median projection is unrevised for the end of this year but is moved up by a half percentage point at the end of the next two years.
If we read between the lines, it is apparent that the Fed is hoping that price inflation will fall to politically acceptable levels without any additional tightening, and without a recession. But “hope” is all the Fed has. The FOMC voting members have no idea what comes next. But, the members apparently still fear politically damaging price inflation isn’t going away as evidenced by most members’ admission that the target rate is unlikely to fall much before the end of 2024. This is notable because the FOMC members tend to strenuously avoid any predictions that rates might tighten further.
A look at the past three years of SEPs shows very little upward movement in target rates. Moreover, in 2021, Fed personnel were insisting with the utmost confidence that the target rate would not increase at all until late 2023. In reality, the Fed was forced to raise rates in 2022 as price inflation soared to 40-year highs. The Fed’s misplaced confidence in 2021 that low rates would endure all relied on a false narrative that price inflation would be either nonexistent or—at most—would be transitory. Fed economists were either lying or were utterly wrong about the state of price inflation. So, if Fed personnel have failed so miserably at predicting price inflation in recent years is there reason to now believe that the Fed now has the situation in hand? No.
The Fed Forced Rates to Ultra-Low Levels for a Very Long Time
Nonetheless, the current narrative about the “hawkish” Fed is that it has slayed the price-inflation beast and that the Fed has allowed interest rates to rise to the “correct” level. Some even claim that the target rate is too high.
Much has been said of how the target federal funds rate is now at the highest it’s been since 2001. Yet, it is important to consider the cumulative effects of ultra-low-interest rate policy that proceeded the recent rate-hiking schedule. The fact is that beginning in late 2007, the Federal Reserve began a policy of forcing down interest rates for a very prolonged period that lasted until 2018. During this period, the target policy interest rate was consistently well below the CPI inflation rate. This produced a negative-value “gap” between the target interest rate and the CPI inflation rate. Then, from 2020 to 2023, this gap was driven deep into negative territory to levels not seen since the mid-1970s.
Indeed, the only period rivaling this post-2008 easy-money policy is the period of the mid-1970s which ended in the historical periods of high inflation experienced during the late 1970s and early 1980s.
The current target rate must be interpreted in light of the long duration of the easy-money years that came before today’s rate-raising trend given. During this period, easy-money fueled bubbles and malinvestments grew for fifteen years. Such immense amounts of monetary inflation cannot be “fixed” with a few months of 5-to-6 percent interest rates.
The long period of ultra-low rates we’ve seen over the past 15 years is a clear historical aberration and the product of a central bank seeking to force down interest rates again and again. Evidence of this can be seen in the Fed’s turn toward purchasing trillions of dollars worth of government debt and mortgage-backed securities (MBS) since 2008. The effect has been to drive down interest on Treasurys and create artificial demand for MBS to prop up commercial banks. An enormous bubble in asset prices—i.e., asset-price inflation—has been one result.
After so long a period, a “cure” for such enormous imbalances in the economy will not be engineered with a “soft landing.”
The claim that interest rates are “high,” of course, are unsupportable so long as the central bank replaces market interest rates with artificial central-bank-manipulated interest rates. The Fed has no idea what the “natural interest rate” is or what market interest rates would be in the absence of the central bank’s incessant interventions. So, it is impossible to say what the “correct” target rate is. Of course, it is safe to assume market rates would be higher than the current policy rate. If market rates would be actually lower than the current target policy rate, then there would be no “need”—”need” as perceived by central bankers—for the FOMC to manipulate rates downward as it is clearly trying to do.
At the First Sign of Trouble, Rates Will Head Down Again
The FOMC’s SEP shows that the target interest rate will remain above 5 percent, even to the end of 2024. There is no telling if the polled FOMC members actually believe this, but it is extremely unlikely that the target rate will remain anywhere near five percent if the employment situation worsens to the point it becomes a political liability for the current regime.
Over the past 30-plus years, the central bank has consistently forced interest rates downward every time high unemployment and recession become evident to the public. Thus, it is likely the FOMC has already maxed out its target rate for this cycle. Yes, the FOMC has only “paused” the rate hikes, meaning it could conceivably move them higher in the near future. For cynical veteran Fed watchers, however, the pause immediately raises the question of whether or not the pause will be followed in, say, six months by a drop in the target interest rate. After all, historical experience shows that when the Fed “pauses” it rarely goes back to any sort of sustained period of monetary tightening.
Over the past thirty years, there have only been a few occasions during which the Fed paused for more than a single month, and then went back to allowing the target rate to move upward again. This occurred briefly in 2017, and in 1996 and 1997. In the quantitative tightening period between the Dot-com Bust and the Great Recession, however, the Fed never “paused” longer than a single month. If the Fed fails to allow rates to climb again next month, we’ll have good reason to suspect that the Fed is done with this current round of rate hikes.
The last decade has shown us that the Fed clings to a bias very much in favor of ramming down interest rates again and again. This is what happened in the ten years of near-zero rates that followed the 2008 financial crisis. Every month, the FOMC would come out and say that the economy was “growing” and was showing “strength” yet repeatedly refused to raise rates. In our current predicament, the Fed is afraid of price inflation, but is also afraid to raise rates even further, even as the August CPI data showed rates ticked upward again. Political expedience demands that the Fed do what it can to rein in price inflation without triggering sizable increases in unemployment. The Fed is holding the current rate steady because politics demands it.
Read More: “Yes, the Fed Really Is Holding Down Interest Rates” by Joseph Salerno.
About the Author
Ryan McMaken (@ryanmcmaken) is executive editor at the Mises Institute. Send him your article submissions for the Mises Wire and Power and Market, but read article guidelines first. Ryan has a bachelor’s degree in economics and a master’s degree in public policy and international relations from the University of Colorado. He was a housing economist for the State of Colorado. He is the author of Breaking Away: The Case of Secession, Radical Decentralization, and Smaller Polities and Commie Cowboys: The Bourgeoisie and the Nation-State in the Western Genre.
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Two Storms, One Harvest
Every food crisis in living memory has been a one-shock event. The 2008 price spike was a commodity bubble. The 2020 shortages were a logistics failure. The 2022 grain scare was a war on one exporter’s ports. Each time, the system bent, adjusted, and recovered, and each time the experts assured us afterward that global markets are simply too big and too diversified to fail.
What nobody in Washington seems eager to discuss is that 2026 is shaping up to be something the modern food system has never actually faced. Two independent shocks, one climatic and one geopolitical, are converging on the same harvest cycle at the same time. Not sequentially. Simultaneously.
Start with the weather. The Pacific Ocean is currently building toward what forecasters now openly call a record event. NOAA’s Climate Prediction Center puts the odds of at least a strong El Niño near 88 percent, with roughly two in three odds it reaches “very strong” status, the tier reserved for perhaps three or four events in the entire satellite era. Every major global model now projects a median peak in Super El Niño territory, and most of them project it exceeding the 2015-16 event, which until now held the modern record. Sea surface anomalies were already brushing the super threshold in mid-July, months before these events normally peak. The atmosphere has already shifted into El Niño mode, and the event is forecast to crest in late fall and early winter.
This is not about “climate change.” It’s about the standard cycles of weather, and the cycle we’re currently in is one that has likely devastated societies in the past. We’re better prepared as a society today, but not all Americans are equally prepared.
Serious households have started doing the quiet math on their own. Grocery bills tell part of the story, and the forecast maps tell the rest, which is why long-term food storage has moved from fringe hobby to mainstream line item in the family budget, with established suppliers like Heaven’s Harvest seeing demand from people who five years ago would have rolled their eyes at the idea. That instinct is not paranoia. It is pattern recognition, and the pattern is worth walking through carefully.
Editor’s Note: Heaven’s Harvest IS a sponsor, but the warnings of this article are real and would be written even if we didn’t have a survival food sponsor. With that said, those who take advantage of what they offer can use promo code “Patriot” for 15% off.
The Fertilizer Clock Is Already Running
While the Pacific warms, the second shock has been unfolding in the Strait of Hormuz. The conflict with Iran turned the world’s most important energy chokepoint into a contested waterway, and the consequences reach far beyond the gas pump. Roughly a third of global fertilizer trade moves through Hormuz, and the disruption sent urea prices up 86 percent year over year by March, with a 53 percent jump in a single month.
The World Bank projects energy prices rising about 24 percent in 2026 and fertilizer about 31 percent. By its own accounting, fertilizer prices ran 35 percent higher in the first five months of this year than the same period last year.
Here is the mechanism the nightly news will not explain. Fertilizer is not a grocery item. It is a time-delayed input. The nitrogen a farmer in Iowa or Punjab could not afford to apply this spring does not show up as a problem this spring. It shows up as a thinner harvest six to twelve months later.
The World Bank’s own food security brief concedes that the effects of reduced applications earlier this season “are likely to become visible only later in harvest outcomes.” Translate that from institutional language into plain English and it means this. The damage is already done, it is already in the ground, and we are simply waiting for it to arrive on the shelf.
Now check the calendar. Six to twelve months from the spring planting season lands us squarely in late 2026 and early 2027. Which is precisely when the strongest El Niño in the instrumental record is forecast to peak, bringing its signature droughts to Southeast Asia, Australia, southern Africa, northern Brazil, and South Asia, the very regions that grow the world’s rice, sugar, and oilseeds.
The World Bank warns openly that a strong El Niño “could disrupt multiple crop belts simultaneously” on top of the conflict-driven input costs. Their baseline projection assumes the Middle East disruptions ease by autumn. What in the last two years of Middle East history suggests that assumption is safe?
The System Has No Slack Left
The comfortable answer is that global markets always adjust. But adjustment requires slack, and the slack is gone. Global cereal production is expected to decline from last year’s records even before El Niño does its work. The UN World Food Programme, hardly a den of right-wing preppers, is calling this the most significant disruption to its supply chains since Covid and the invasion of Ukraine, and its supply chain director put the stakes bluntly.
Today’s supply chain challenges are tomorrow’s hunger crisis.
There is also a political dimension that markets cannot price. When food gets scarce, governments do not behave like economists. They behave like politicians. Export bans, hoarding mandates, and panic buying at the national level turned the modest rice shortfall of 2008 into a global crisis, and analysts are already warning that import-dependent nations are the first dominoes.
The 2015-16 Super El Niño, a far weaker event than what is now forecast, threw tens of millions into food stress across Africa and Asia. This one is projected to be stronger, and it arrives with fertilizer already rationed by price and shipping lanes already contested by missiles.
What Joseph Knew
Scripture does not treat preparation for lean years as faithlessness. It treats it as wisdom delivered in advance to those willing to act on it.
Behold, there come seven years of great plenty throughout all the land of Egypt: And there shall arise after them seven years of famine; and all the plenty shall be forgotten in the land of Egypt.
Joseph did not respond to that warning with a hashtag or a committee. He stored grain during the years of abundance, and when the famine came, Egypt stood while its neighbors begged. The lesson is not that famine is certain. It is that the time to prepare is precisely when preparation still looks optional.
Nobody who filled a pantry in a year of plenty has ever regretted it, and nobody standing in an empty aisle has ever been glad he waited for certainty.
None of this calls for panic, and panic is the enemy of sound judgment anyway. It calls for the same unglamorous prudence our grandparents considered ordinary. Keep some cash margin, know your local growers, and put real food in deep storage while it is cheap and available, because the entire arc of this story is that cheap and available is a closing window.
Families looking for a straightforward place to start can visit Heaven’s Harvest and use promo code Patriot for 15 percent off long-term storable food. The forecasts may yet soften, the strait may yet reopen, and we should pray they do. But hope is a fine thing to hold and a foolish thing to eat.