For most of modern history, America’s economy moved to the beat of the Federal Reserve. A small tweak to interest rates here, a quiet shift in lending policy there – and markets, businesses, and consumers would all respond like clockwork.
The Fed was the maestro. The economy was its orchestra. But today, the sheet music has changed. We’re entering a new era – an era where fiscal policy, not monetary policy, calls the tune.
In this world, it’s no longer a question of whether the Fed cuts or hikes rates by a fraction of a point. It’s about how much Washington spends, how big the deficit grows, and what kind of tariffs or subsidies get rolled out next.
In short: the new invisible hand guiding the economy is federal spending – not the Federal Reserve. And most people haven’t caught up to that reality yet.
Here’s the heart of it: for years, most new money in the economy came from banks making loans. Now? It’s coming from the federal government’s enormous deficits.
We’re talking $2 trillion deficits – year after year – even during economic expansions, not just during recessions or emergencies. That’s a fundamental shift. Interest rates still matter, of course. Mortgages are pricier.
Car loans sting. But raising rates by half a point isn’t going to stop Washington from spending like there’s no tomorrow.
In fact, higher rates just mean the government owes even more in interest – pumping even more money into the system, not less.
The Fed can tinker around the edges. But it’s like trying to steer a runaway freight train with a bicycle brake.
There’s another twist too. The Fed’s other tool – shrinking its balance sheet through “quantitative tightening” – is on borrowed time. Squeeze too hard, and they risk breaking the banking system’s plumbing, just like in 2019.
By 2025, the Fed will probably have to halt QT altogether. Maybe even quietly start expanding again – even if inflation isn’t back to “normal.” And that would send a very different signal to markets than we’re used to.
Meanwhile, the bigger forces aren’t rate hikes. They’re tariffs, industrial policy, subsidies, spending bills – the stuff coming straight out of Washington. If Trump slaps 20% tariffs on imports? That’s a bigger economic shock than three Fed hikes combined.
If Congress unleashes another trillion dollars in stimulus? Same thing. In short: the real economic wildcards today aren’t being drawn by the Fed. They’re being dealt by politicians.
What does that mean if you’re an investor?
It means the old rules aren’t enough anymore. You can’t just listen for hints about rate cuts at Jackson Hole and call it a day.
You need to watch Congress. Track fiscal deficits. Understand which industries are being targeted for subsidies – or tariffs. Hard assets like energy, infrastructure, bitcoin, real estate – they’re likely to do better. Paper assets tied to government promises? Maybe not so much.
If fiscal policy now dominates the economic landscape, the smart money needs to rethink old strategies. Real assets like energy, infrastructure, and commodities could shine brighter than paper assets.
Hard money hedges such as gold, Bitcoin, and real estate may outperform cash and bonds. Bond investors must watch not just inflation, but Washington’s spending habits.
Bottom line: investing today requires a keen eye not just on interest rates, but on deficit trajectories, tariff risks, and industrial policies. In this new era, politics and economics are more intertwined than ever before.
*Heath Muchena is the founder of Proudly Associated and author of Blockchain Applied, Tokenized Trillions and Why Emerging Markets.
