Much like how Superman stops holding back when he fights Doomsday or Darkseid, Congress and the Fed took the gloves off and collectively threw trillions of dollars at the problem, with programs that were hastily put together. And after a delay, as that vast amount of money worked its way through the system, we indeed got broad consumer price inflation. Faced with a rock (deflationary collapse) or a hard place (inflation), they chose the latter, as they basically have to do at that point.

The problem, of course, is that central banks like the Fed cannot print oil, copper, ships, ports, or manufacturing facilities. They can’t improve the supply of real-world goods and services. All they can do, is try to weaken the demand for those things. They have to try to make you and me spend a bit less, to let the supply/demand balance of things improve, and to slow down the rate of new money creation.

The Fed can likely tighten for a period of time longer. However, if the Fed raises rates to 3%, 4%, 5%, and so forth when debt as a percentage of GDP is this high, the annual interest expense of the US Treasury would exceed $1 trillion, and many companies and households would run into trouble refinancing their debts.

The dollar would likely strengthen further in that scenario, which would squeeze all of the countries that have a lot of dollar-denominated debt (which is primarily owed to places like Japan, Europe, and China).

I think the Fed will probably get some signals to stop tightening monetary policy prior to hitting very high levels, once something in financial markets breaks. And I think that will happen before they reach 3% short-term interest rates, and/or before $1 trillion is off the balance sheet, but we’ll see.

Consumer sentiment, for example, is already at recessionary levels:

This time it could be credit markets again, or the Treasury market, or a couple quarters of recessionary indicators. Whatever breaks is usually not the specific thing that most people are looking for.

Markets are funny in the sense that they tend to repeat the same pattern enough times to convince everyone to anticipate it, and then they change the pattern. In other words, once a pattern becomes sufficiently priced in, that’s probably not what will happen. The past few years have been historically unusual, and I suspect the next few years will be historically unusual as well, with all sorts of unique exceptions and unintuitive outcomes.