Higher for Longer
The Fed is on hold at 3.5–3.75% and leaning hawkish, with three officials voting to hike in July. Inflation is split: core CPI has cooled to 2.5%, a five-year low, but core PCE is still at 3.3%. Jobs are cooling too, with a loss of 23,000 in July. Our base case: the Fed stays put, and any future cuts come slower than in the last decade.
More importantly, the Fed only controls short-term rates. The market sets long-term rates, and it’s pushing them up: the 10-year is near 4.65%, and the 30-year touched 5.34% this week, its highest since 2007. Sticky inflation, higher oil, and heavy government borrowing are the drivers. The real question isn’t when the Fed cuts, but what happens if short rates fall and long rates don’t.
Lessons from Japan
Japan’s government debt is roughly 230% of its economy, the highest in the developed world, yet it’s never had a debt crisis. Its debt is owned at home, the Bank of Japan is a steady buyer, and its institutions are stable. The lesson: debt crises come from lost confidence, not from a big number alone.
For scale, Greece is next at 147%, and the U.S. is around 125%. Japan is also adapting to its demographics rather than fighting them, drawing more women and seniors into the workforce and investing heavily in automation and robotics.
Europe’s Different Path
Europe faces the same pressures as Japan: aging populations, low birth rates, rising pension costs. But it differs in three ways: it leans on immigration, it has many governments and budgets rather than one, and it borrows from global markets, not its own savers. Europe’s bigger risk isn’t stagnation, it’s political instability.