Fed Hikes Not Over: Economy ‘Can’t Deal’ With What Comes Next | Komal Sri-Kumar

David Lin (0:00)

The Fed raised the Fed funds rate for the first time today on Wednesday, September 16th, in three years.

SPEAKER_2 (0:06)

In the meeting just concluded, the FOMC decided to raise the target range for the federal funds rate by a quarter of a percentage point to three and three quarters to four percent in support of the Federal Reserve's dual mandate. But inflation remains elevated.

Today's policy action will support a timelier return to the committee's two percent goal. This committee will deliver price stability.

David Lin (0:32)

The big question is, is this a one and done hike or the start of a much bigger rate hike cycle? The last rate hike cycle saw the Fed funds rate go up in March 2022, following unprecedented quantitative easing just two years prior.

Between 2022 to July 2023, the Fed hiked 500 basis points. And during this one year rate hike cycle, the S&P 500 fell almost 30 percent. So, will this time be any different? Is another bear market just ahead? Will the economy survive much higher rates? And how many more rate hikes can we expect? We'll answer all these questions and much more today with Komal Sri Kumar, president of Sri Kumar Global Strategies. Right now on Kalshi, traders are pricing it a 64 percent chance of exactly two rate hikes this year. If you agree, a $50 trade can yield $76 if you're right. Komal Sri Kumar will give his predictions, so stay tuned.

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Sri, welcome back to the show. Good to have you today on Fed Day.

Komal Sri-Kumar (2:02)

Good to be back with you, David. Thank you for having me.

David Lin (2:05)

The big talk is bond yields. People have been saying bond yields have reached a level where it forced the Fed to finally raise rates.

Here is their explanation for why bond yields have risen. I'd like to play for you this clip where we act and I'd like to get your opinion and assessment as to where bond yields are headed after today. Take a listen.

SPEAKER_4 (2:25)

Longer term bond yields are up quite a bit over the last few months, especially the last few weeks. What do you believe the bond market is telling you, especially about the growth outlook, the neutral rate, and what are the implications for monetary policy?

SPEAKER_2 (2:35)

Why did yields rise, let's say since the last FOMC meeting till this? I'll give you three reasons, but I would say these things tend to be over determined. I'll say three things. First is economic strength. I mean, part of the reason why we've seen over the course of 2026 long-term yields go up is the economy is strengthened. Second reason, competition for capital.

The surge in capital expenditures, which I referenced in my remarks, is real, and the so-called hyperscalers are out in the market raising funding, and so the competition for capital is real, and I think it partly explains the increase in yields. The third is geopolitics. The situation hot spots around the world are driving long-term yields. It's not simply spot prices of energy or spot prices for corn or soybeans or wheat, but it's the difference between those spot prices and so-called crack spreads, what that means for products that find their way into stores across the country. I think those are the three leading explanations, but certainly not exclusively.

David Lin (3:45)

Do you agree Sri with those explanations?

Komal Sri-Kumar (3:48)

Those explanations are factors, David, but he missed out the two much more important reasons why the bond yields are so high. One, the US fiscal, the total debt is over $40 trillion as of August of this year, and the deficit is running at $2 trillion every year, and interest payments have become a bigger source of spending than defense expenditure.

Those two, he didn't even touch upon, and why? Because he did not want to upset Donald Trump, who is probably already upset that he increased the interest rate by 25% when the president had called for lower interest rates. So the two major reasons for why the bond yields were higher were missed out in his explanation, and I think that's the reason why the bond yields went up as he was speaking and closed the day at higher levels than before he started to speak.