The market has priced in a roughly 93% chance that the Fed will raise rates by 25 basis points at tomorrow’s meeting as Kevin Warsh’s FOMC attempts to rein in inflation. That may disproportionately hit the bottom of America’s “K-shaped” economy, raising debt service costs without providing legitimate relief, according to Yung-Shin Kung, CIO of Mast Investments. “The primary way the increase would work is by imparting further pressure on the bottom of the ‘K’ that is already struggling to overcome a supply shock,” Kung wrote on Tuesday. “Hiking would be a high-sacrifice, misguided tool that extracts most of its cost from people who are not the source of the inflation problem.” The primary responsibility for the inflation crisis, Kung said, lies with tariffs, the rise of artificial intelligence, the supply of oil and the accumulation of wealth in the stock market, all of which he believes are best addressed by balance sheet adjustments by the Federal Reserve, not by changes in rates. The argument is that raising rates doesn’t create more oil. Low-income consumers would effectively see their wallets hit twice, Kung said. First, they must pay for price increases seen in categories like food and housing, “which an increase in interest rates barely touches.” Then, stricter credit conditions make debt service more expensive. Meanwhile, Kung said, “the real driver of any genuine excess demand remains largely intact.”
