The Fed Is Hiking Into a Crash

The bond market is closed today.

It's Veterans Day, and while the stock exchanges stay open, the Treasury market takes the day off. So the market that sets the price of government debt goes quiet for a day, in the middle of the most important month it's had in years.

Yesterday morning the government published an inflation report with no annual inflation rate in it.

On December 9, the Fed decides whether to raise interest rates again. As of Friday, traders put the odds of a hike at 77%.

And it would be doing that one month after the chip stocks had their worst day since the COVID crash.

Three times in the past hundred years, the Fed has raised rates into a market that was already falling and then reversed itself within the year.

It kept going once, in 2022, and the difference between those cases tells you more about 2027 than anything the Fed says on December 9.

An Inflation Report With No Inflation Rate

Every month, the Bureau of Labor Statistics tells you how much prices rose over the past year, and that's the number you hear on the news. Yesterday it couldn't.

During the government shutdown last fall, the bureau's price collectors didn't go out.

For the first time in its history, it skipped a month, and there's no October 2025 inflation reading. So this October's prices have nothing to be compared against.

The bureau said in advance it would publish the one-month change and leave the 12-month rate blank for most of the report. The one-month change came in at 0.4%, and if that keeps up for a year, you're looking at close to 5%.

The last full reading we have is September's. Prices were up 3.7% over the year, from 3.4% the month before, and most of the jump came from energy. Gasoline alone rose 9.1% in a single month after oil went back above $100.

That's the inflation the Fed is fighting. It can't drill for oil or end a war, so it does the one thing it can, which is make borrowing cost more until people buy less of everything else.

Warsh Is Hiking Against the President Who Picked Him

The Fed chair, Kevin Warsh, was the President's pick. The President has demanded lower rates, loudly, for most of two years.

Warsh hasn't delivered. In September, the Fed raised rates for the first time in this cycle, to a range of 3.75% to 4%, on a unanimous vote.

On October 28, it held, and two members voted against holding because they wanted another hike.

Last Thursday, with the Nasdaq down more than 1,400 points, two regional Fed presidents hinted that more hikes were coming. On Friday, after the jobs report, San Francisco's Fed president said the central bank would likely have to tighten further.

So the people who set rates are telling you, in plain English, what they intend to do.

And on paper, they have a case. Inflation is 3.7%, unemployment is 4.1%, and the economy added 165,000 jobs in October, about two and a half times what economists expected.

If you only looked at those three numbers, you'd hike too.

What the Three Numbers Leave Out

Wages were up 3.1% in October. Prices were up 3.7% in September, the last annual reading we have. So the average worker's paycheck buys less than it did a year ago, and it's been that way for about six months.

Housing and food took up nearly half of what American households spent in 2025, the biggest share in 15 years. The average family spent close to $2,000 more on housing and food than it did the year before, and that was before oil went back above $100 this year.

A rate hike doesn't bring gasoline down. It makes the car loan and the credit card more expensive for the family that's already paying more for both.

Then there's the stock market itself. A big piece of the spending that kept the economy growing came from people who felt rich watching their portfolios.

Goldman Sachs estimates that effect added about 0.4 percentage points to consumer spending growth over the past year. Most of it sits with the top 10% of earners and people over 55, which is to say, the people who own the most stocks.

Thursday took a bite out of that. A December hike takes another one.

The Bond Market Has Already Voted

Now look at what the bond market did while the Fed was talking.

The two-year Treasury yield, which is the market's best guess at where the Fed's rate will average over the next two years, peaked for the year at 4.92% on September 28. On Thursday it closed at 4.46%, and it bounced to 4.51% on Friday after the jobs report.

That's a drop of about 40 basis points, or 0.4 of a percentage point, in six weeks.

The two-year still sits above the top of the Fed's range, so the market agrees that December brings a hike. But it's pricing fewer hikes after that than it was in September, and it's been getting less sure every week.

The 10-year tells the same story. It yielded 5.31% on October 5 and 4.86% on Friday.

Historically, the two-year yield turns before the Fed does. The Fed follows it, usually with a lag of a few months, and usually after insisting it won't.

Three Times the Fed Hiked Into a Falling Market

Which brings me to the three times I mentioned.

In August 1929, the New York Fed raised its lending rate to 6%. The stock market peaked less than four weeks later, crashed in October, and the Fed was cutting by November.

On May 16, 2000, the Fed raised rates by half a point, to 6.5%. The Nasdaq had already peaked in March and was down more than 25%.

That hike lasted until January 3, 2001, when the Fed cut in an emergency move between meetings. I was working in tech then, and I lost that job in the bust. A rate cut doesn't rehire anybody.

On December 19, 2018, the Fed raised rates with the S&P 500 already down about 14% from its high. Five days later, on Christmas Eve, the market bottomed just short of a 20% decline.

Within three weeks the Fed chair was on stage promising to be patient, and by the following July it was cutting.

Each time, the Fed had a reasonable argument on the day it hiked, and each time the hike was gone within a year.

The exception is 2022. That March, the Fed started hiking with the S&P 500 already down 9% and the Nasdaq down 16%, and it kept hiking for 16 months.

The first cut didn't come for two and a half years. But inflation was 8.5% that month and rates were starting from zero. Today inflation is 3.7% and rates are already at 4%.

December 9 won't be 1929. An economy that just added 165,000 jobs in a month is a long way from that. But when the Fed tightens into a falling market from a starting point like this one, it has a long record of changing its mind within the year. I'd rather be positioned for the change than for the hike.

Washington Needs the Opposite

There's one more reason I expect the Fed to change its mind, and it has nothing to do with stocks.

The Treasury plans to borrow about $800 billion in the first three months of 2027. That's 29% more than this quarter and 39% more than the same quarter this year.

And it's borrowing short. More than 80% of the paper the Treasury sold this year was bills, which come due within a year, and the average maturity of this year's new debt is about 1.7 years, according to Apollo's chief economist. A company that borrowed like that would get a lecture from its bankers.

Short debt means every rate hike shows up in the government's interest bill almost immediately. A quarter-point on $800 billion is $2 billion a year, on one quarter's borrowing.

Meanwhile the buyers are thinning out, the way they did for Jay Cooke. America's allies bought about $174 billion of Treasury notes and bonds in the first eight months of this year, less than 40% of what they bought over the same stretch a year earlier and the least since 2021.

A State Street strategist told Bloomberg the market was losing its "automatic buyers," the ones who used to recycle their dollars into Treasuries without thinking about it.

So you have a Fed that wants rates higher and a Treasury that can't afford them. My read is that when those two disagree for long enough, the Treasury wins, and it wins by the Fed finding a reason to ease.

I showed you in Why Washington Wants Gold Higher what that usually means for the price of gold. Friday I'll show you who else has figured it out.

One Move: Watch the Two-Year, Not the Fed

Here's the one thing I'd do, and you can do it in thirty seconds a day.

Look up the two-year Treasury yield, which any finance site has, and compare it to the Fed's range, which today is 3.75% to 4%.

As long as the two-year sits above 4%, the market expects the Fed to keep hiking, and your bonds, your mortgage and the stocks in your borrowed-money pile will keep fighting that current.

The day it closes below 4%, the market has decided December's hike was the last one.

The day it closes below 3.75%, the market is betting on cuts, whatever the Fed is saying that week.

It fell from 4.92% to 4.46% in six weeks without a single cut. I'd rather know that than guess what Warsh says at the press conference.

If it were me, I wouldn't try to front-run December. The Fed says it'll hike and the market agrees, so take them at their word. I'd spend the next four weeks making sure I owned things that do well when the Fed changes its mind, because that's the bet with history on its side.

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