To The Moon

Core PCE inflation is 3.1%. In the five cycles since 1990, the Fed has not once started cutting with core PCE inflation at 3% or above.

At the same time, US debt is nearly back to 1946 levels. Those two facts pull against each other. Here is what the long record says about each, and a scorecard you can run on any indebted government.

1. THE 3% LINE

I looked at the six major cutting cycles from 1989 to 2024, measuring core PCE inflation in the month before each first cut. Since 1990, the highest reading at a first cut was 2.9%, in Sep 2024. The last first cut with core PCE inflation at 3% or more was Jun 1989, at 4.4%.

Today core PCE inflation is 3.1%, and the last hike was only 1.5 months ago.

Across the six major cutting cycles from 1989 to 2024, the Fed held at its peak for a median 7.5 months, with a range of 0.7 to 14.7 months.

This is a pattern from a handful of cycles, not a law. But it says where the bar has sat.

2. STICKY LIKE THE LATE 1980s

Core PCE inflation has been at 2.5% or more for 66 straight months, since Apr 2021. That is the longest run since the one that ended in Nov 1993.

In my 28 Oct post, the trigger to change my mind was Sep core PCE inflation at or below 3.0%. It printed 3.1%, so the trigger did not fire and the view held.

3. A THIN CUSHION

The real policy rate is the fed funds rate minus core PCE inflation. At past first cuts it ranged from +2.4 to +5.4 points, with one exception.

The exception was 2019, at +0.8 points, when core PCE inflation was only 1.6%. Today the real rate is also +0.8 points, but with core PCE inflation at 3.1%.

Same cushion, nearly twice the inflation. That leaves little room to cut before policy stops restraining prices at all.

4. DEBT IS NEARLY BACK TO 1946 LEVELS. THE ESCAPE ROUTE IS NOT.

In 1946, debt held by the public was 106% of GDP.* CBO puts it at 101% in 2026 and projects it passing that level in 2030.

Under current law, CBO projects 120% by 2036 and 175% by 2056.

After the war, the ratio shrank mainly because interest rates sat far below growth. The gap is called r minus g: the average rate paid on debt minus nominal GDP growth.

From 1963 to 1974, r minus g averaged -3.7 points.

Earlier, real T-bill yields ran from -6.6% to -13.8% in 1946-48.

Today the gap is closing fast. r minus g was -4.5 points in FY2023, -2.3 in FY2024 and -1.5 in FY2025.

5. THE SCORECARD: IS 1946 REPEATING?

Here is the method. Score four conditions that did the work after 1946. It runs on any government with a debt problem.

Condition one, growth above rates. Still yes, but the gap is shrinking, from -4.5 to -1.5 points in two years.

Condition two, primary surpluses (the budget before interest). No. The average was +0.3% of GDP in 1962-74, against -2.7% in FY2025.

Condition three, deeply negative real rates. No. The real policy rate is +0.8 points and the real 10-year yield is +1.9 points.

Condition four, inflation help. Some. CPI inflation averaged 4.5% a year from 1946 to 1980, and nominal growth averaged 7.1% from 1947 to 1974.

My score: one and a half of four. That is my read, not a forecast.

6. THE BILL IS THE TENSION

Net interest reached 3.2% of GDP in FY2025, just above 1991 and the highest since at least 1962. It also took 18.5% of federal revenue, the highest in that record.

CBO projects net interest at 4.6% of GDP by 2036 and 6.9% by 2056.

The 10-year Treasury yield has closed at 5.0% or higher on 26 days this year. Before 2026, the last such close was on 19 Jul 2007.

So "higher for longer" and "the debt needs lower rates" point in opposite directions. The inflation record supports the first. The debt record shows why the second matters.

THE COUNTER-CASE

Higher for longer has ended before, and fast. In 2001, 2007 and 2019, the hold lasted 7.6, 14.7 and 7.4 months, and each ended through a growth or credit shock.

Each of those three was followed by a recession within 12 months of the first cut. That is the path that would change my view.

Today the alarm is off. Unemployment is 4.2% and the Sahm rule reading is 0.00, against a trigger of 0.50.

One soft spot: core PCE inflation's 3-month annualised pace is 2.9%, a little under the 3.1% yearly rate. If that keeps cooling, the 3% line comes into reach.

THE DATED TESTS

Jobs report, Fri 6 Nov, 21:30 SGT. A jump in unemployment would start the counter-case.

October CPI, Tue 10 Nov, 21:30 SGT. A cooler core reading in that report would weaken the 3% case.

FOMC statement, Thu 10 Dec, 03:00 SGT. My read is a hold or a hike, not a cut. I will also compare the 2027 median projection with September's 4.1%.

I will score these either way, hit or miss.

When you look at a government's debt, do you check whether growth still runs above the rate it pays, or do you stop at the debt-to-GDP headline?

* The 1946 figure is the high CBO cites; the long annual series behind it comes from OMB's historical tables (via FRED).

Not advice. I may hold positions in the names mentioned.

Stop guessing. Start calculating.

Live to fight another day. 🤙

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