David Lin Sep 20, 2026 32m 18m saved
With Komal Sri-Kumar, President of Sri-Kumar Global Strategies
The Federal Reserve raised its target range by a quarter point to 3.75–4%, and Komal Sri-Kumar's verdict was that the size of the move was decided by the White House rather than by the data.
An economist who wanted tighter policy might be expected to welcome a hike. Sri-Kumar had argued for 50 basis points in his weekly report the Saturday before, and said the smaller move told the bond market nothing about the Fed's resolve. The 10-year Treasury yield rose while the press conference was still going on.
"There is no economic reason. The economic reason would in fact have argued for a 50 basis point increase. The reason for not doing it is political reason."
Sri-Kumar, president of Sri-Kumar Global Strategies, on David Lin, publishes a weekly report that called this hike before it happened, and has been making the case for a half-point move on this show for months. He spoke on the afternoon of Wednesday, September 16, hours after the decision and the press conference.
The full interview is covered here so you can skip it. 32 minutes of audio, 14 minutes of reading.
Here are the 14 predictions that matter.
Key Takeaways
The hike was 25 basis points for political reasons, when the economics argued for 50
Two hikes in 2026, and the second one comes in December rather than October
The October meeting falls four days before the midterm elections, and the Fed does not move that close to a vote
The two reasons for high yields the Fed chair left out: $40T of debt and a $2T annual deficit, with interest now costing more than defense
The Treasury's buyback failed on its own numbers — the 10-year yield was higher after it than before
Productivity gains will not bring inflation down, because the spending that produces them competes with the Treasury for the same lenders
Higher oil warrants higher rates, not an exemption from them, exactly as in the 1970s
Mortgage rates just below 7% freeze the housing market at both ends, and the stock market is next
The dot plot showing no rate rises in 2027 is unrealistic, given the Fed's own 2029 date for reaching 2% inflation
AI capital spending keeps yields elevated, and elevated yields are what produce a financial accident
1. Why Yields Are Really Up
Lin played a clip from the Fed chair's press conference in which he gave three reasons for the rise in long-term yields: a stronger economy, competition for capital from hyperscalers raising money for capital spending, and geopolitics feeding through to the prices of refined products rather than raw commodities. Lin asked whether Sri-Kumar agreed.
He said the three are real and that the two biggest ones were missing.
The debt, the deficit and the interest bill were left out
One, the US fisc 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.
Komal Sri-Kumar
His explanation for the omission was political: naming the fiscal position would have pointed at the administration, which was already unhappy about the hike itself. He then gave the evidence that the market had not been reassured.
Yields rose while the chair was speaking
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.
Komal Sri-Kumar
2. The Hike Was Too Small
Lin put the standard reading to him: if the bond vigilantes forced the Fed to act, yields should fall once it acts. Sri-Kumar said that only works if the action is big enough to make betting against bonds a losing trade.
A half point at once would have shown determination
I had written last Saturday in my weekly report that the Fed ought to go up by 50 basis points. If they had done that at one fell swoop, they would have shown that they have a determination to reduce inflation.
Komal Sri-Kumar
He also flagged the chair's own position in the decision. Warsh did not vote, and the dot plot pointing to one more hike this year is a document he did not contribute to.
The chair is talking like an observer of his own committee
He's behaving as if this is a decision of the federal open market committee to which he does not belong. He speaks more like an observer rather than an integral member of the committee.
Komal Sri-Kumar
Asked how anyone can tell whether this is one and done or the start of a 2022-style cycle, he said a genuine one-and-done would have been the larger move, followed by a statement promising more if needed. Neither happened, and no forward guidance was given.
3. Two Hikes, Not One
Lin showed what the banks were forecasting as of September 11: most of them at 50 to 75 basis points for the year, Goldman Sachs at 25, Jefferies at 25 and HSBC at none. The prediction market Kalshi had a 64% chance of exactly two hikes in 2026. Sri-Kumar put himself in that camp, and named the meeting.
The second hike is December, not October
The end of October Federal Open Market Committee meeting will be barely four days before the midterm elections. Typically, the Fed does not hike just before the elections, and I don't think it'll happen this time either.
Komal Sri-Kumar
4. Politics, Not Economics
Lin asked the question directly: setting the midterms aside, was there an economic reason not to do 50 basis points on the day? Sri-Kumar's answer was the bluntest of the interview.
The economics argued for 50; the politics produced 25
There is no economic reason. The economic reason would in fact have argued for a 50 basis point increase. The reason for not doing it is political reason.
Komal Sri-Kumar
The president had wanted a cut, he said, and doubling the size of the move against that wish would have drawn criticism from the White House and, he expects, from the Treasury secretary as well.
5. Productivity Won't Save It
The Fed's statement described productivity growth as strong and capital investment as robust. Lin asked whether stronger productivity could bring inflation down without slowing growth much. Sri-Kumar said the two halves cancel out, and explained the first half in units.
Productivity on its own is disinflationary
It means that every worker working to produce widgets is now producing 50 widgets per hour rather than 40 widgets. That is the increase in productivity and that will cause the price to come down.
Komal Sri-Kumar
The problem is what it takes to get there. The spending that buys the productivity is money raised in the same market the government borrows in.
The spending more than offsets the productivity
There is a lot of spending as well and these companies are competing with the US Treasury in the same market to borrow from investors and that is why I think despite an improvement in the productivity, the total effect is going to be an increase in prices rather than in a fall
Komal Sri-Kumar
6. Hiking Into An Oil Shock
Asked how much of this inflation the Fed can actually fight, Sri-Kumar went back to the decade the question was first asked in.
The 1970s posed the same question
The oil prices had increased substantially in 1973 and the rest of the decade. The question was do you increase interest rates when the cause of the inflation is higher oil prices?
Komal Sri-Kumar
His answer is that not raising does not make the inflation go away; it only removes the instrument. Raising rates curtails demand, brings the economy close to a halt, and squeezes the inflation out.
Lin pressed on the textbook: does monetary tightening during a supply shock differ from tightening in a boom? Sri-Kumar said it does not.
The remedy does not depend on where the inflation came from
So I think David that the solution is the same irrespective of the source of the inflation.
Komal Sri-Kumar
7. Demand Destruction Blocked
Lin offered the counter-argument some economists make: expensive oil destroys demand by itself, so the oil market is doing the Fed's job. Sri-Kumar agreed with the economics and said the politics will not allow it to play out.
Self-correction needs time that politicians will not give it
They will bring down the pace of economic growth and they would be self-correcting allowing if you allow enough time. The problem is politics does not allow politicians to pursue that path.
Komal Sri-Kumar
No administration wants to tell voters that the price rise is the producers' doing and not its own, he said, and the president has gone further by calling affordability a false story. What follows instead is stimulus, which makes the inflation worse.
8. What Forces More Hikes
Asked what would turn this into a long cycle of one to two percentage points, he named the trade dispute with Canada first, and tariffs against other countries after it. The second source is fiscal, and he framed it as a failure to act rather than an event.
Nothing has been said about closing the deficit
Nothing has been said by Treasury Secretary Scott Bessent as to how he is going to bring down the fiscal deficit. Tax increases, spending cuts. We have not heard a thing.
Komal Sri-Kumar
The mechanism from there is supply. A deficit that size means more Treasury securities, which investors take only at higher yields, which puts the Fed back in the position of raising again.
The Fed keeps raising because the Treasury will not do its part
So then again, the Fed has to step in and keep increasing its interest rates because the Treasury refuses to do its part.
Komal Sri-Kumar
9. The Buyback That Failed
Lin played a clip from the Treasury secretary's appearance at the House Financial Services Committee the day before, in which a Democratic congressman pressed him on the roughly $10 billion spent buying back long-dated bonds: the 10-year yield was 4.8% when the operation started and 5.04% at the time of the hearing, so what did the intervention achieve. The secretary answered on the counterfactual and pointed to two strong auctions.
Sri-Kumar sided with the congressman, and said the scale answers the question.
A $6 billion buyback against that market is a drop in the bucket
It's a $6 billion amount that he spent and you are talking about a bond market which is huge some 30 trillion in size and the deficit alone every year is running at $2 trillion.
Komal Sri-Kumar
Spending more cash would have meant a bigger loss if it failed again, he said, which is why the operation stayed small. Asked whether the Treasury can eventually bring long yields down, he said not this way.
Small buybacks will not work; a fiscal plan would
The Treasury will not be successful if what they are going to do is these kinds of teeny weeny buybacks.
Komal Sri-Kumar
What would work, on his account, is an explanation, probably after the midterms, of how taxes go up and how entitlement spending comes down. His example was raising the age at which Social Security and Medicare benefits begin from 65 to 70 or 72.
10. Mortgages Near 7%
Asked what rising yields do to the economy as an ordinary household experiences it, Sri-Kumar started with the 30-year mortgage rate, just below 7% and sharply higher in recent weeks. It freezes the housing market from both sides: buyers priced out, and existing owners unwilling to trade a cheap mortgage for an expensive one.
Both ends of the housing market seize up
And people who do own homes, who should be moving to a bigger home, they do not want to sell their home because they got their mortgages long time ago at a much lower interest rate and they do not want to trade it for a mortgage at 7%.
Komal Sri-Kumar
Car loans discourage the same way, he said, and the cumulative effect is downward pressure on spending.
Equities have been resilient, and he expects that to end
So, you are going to see the headwinds come and attack the stock market which have so far remained resilient. But I think that is going to change with the higher bond yields.
Komal Sri-Kumar
Lin then asked whether the economy could take higher inflation for longer, assuming the Iran war does not de-escalate, on top of higher rates.
It cannot take both at once
The economy cannot deal with it.
Komal Sri-Kumar
The alternative he described is a compromise that ends the war, which would also cut defense spending and make room to reduce other spending at home.
11. The Income Split
The Atlanta Fed's GDPNow estimate had third-quarter growth at 5.1%, and Lin asked whether that was believable. Sri-Kumar said it was, and that the composition matters more than the number. Consumer sentiment is low and retail spending still came in strong at 1.2% month on month.
One aggregate number hides two different economies
What is happening David is that the higher income groups are still spending in a big way and the lower income groups are being left out.
Komal Sri-Kumar
Growth supported by a widening gap between rich and poor does not show up in the headline, he said, and the suffering behind it does not show up in the statistic either. Asked where the number goes next year, he said lower, because higher oil and higher prices generally will make even affluent households cut back.
12. AI Capex Breaks Something
Lin asked whether the data center build-out could offset the damage from higher rates and inflation. Sri-Kumar said it is part of the damage, through the channel he had already described.
Heavy capital spending keeps yields up, and elevated yields break things
I worry that the big spending on AI in the capital spending side is going to cause some form of accident because it keeps the bond yields up and as the bond yields remain elevated, that typically results in some form of financial accident.
Komal Sri-Kumar
The date he used to make the point is the one the whole market has been quoting this week.
2007 is the comparison, and 2008 is what followed it
For example, we say that the 10-year yield today is the highest since 2007. But remember, 2007 just preceded the financial crisis of 2008.
Komal Sri-Kumar
13. The Debt Feeds Itself
Lin raised a point Sri-Kumar had sent him in his notes: rising rates raise the government's own interest costs, which have to be met with higher taxes or lower entitlement spending. Sri-Kumar described the loop.
Interest is paid with borrowed money, so the debt compounds
If you are making if you have a deficit of about $2 trillion and you're making a huge payment of interest every year that as in order to make the interest payment you need to borrow more money.
Komal Sri-Kumar
The exit is to shrink the debt itself, which he said would bring down both inflation and interest rates. His two specifics were cutting entitlement spending and reversing the tax cuts of the second Trump administration, which he described as weighted toward higher earners.
The tax cuts have to go
Those tax cuts simply need to go because we can't afford it.
Komal Sri-Kumar
14. No Hikes In 2027?
Asked what data the Fed watches from here, Sri-Kumar said inflation rather than employment, because he does not expect the labor market to fall apart while the Iran war and the closure of the East-West pipeline in Saudi Arabia keep upward pressure on oil. Those effects have not reached the consumer price numbers yet and will show up in the September and October readings.
Then he took apart the projection the Fed published that afternoon.
A dot plot with no 2027 hikes does not fit its own inflation date
They show that inflation comes down to the 2% level their target only in 2029 and yet they are assuming no increase in interest rate in 2027. And that to me doesn't make any sense.
Komal Sri-Kumar
His own expectation is that rate rises continue past this year unless the fiscal side cooperates, through lower spending or higher taxes.
Bonus Insights
The unanimous vote helps Warsh politically
On the 12-to-0 vote, Sri-Kumar said the result was neither hawkish nor dovish, and that its value is political: with every voter behind him, the chair cannot be singled out as the one official who wanted to raise. A couple of dissents would have handed the president that line.
The Phillips curve no longer describes anything
Asked whether the inverse relationship between unemployment and inflation still holds in a supply shock, Sri-Kumar said it does not and that the curve does not exist any more. A significant increase in money supply, or a set of tariff shocks, shows up in inflation and in the bond market before it touches employment.
The tariff story is not about Canada
Lin put the US-Canada dispute in perspective, at around $20 billion of trade and about 5% of imports on the Canadian side, and asked how worried he was. Sri-Kumar said the number understates it, because the same pattern runs to Mexico, the largest trading partner, and to the European Union, where German cars are getting more expensive in the US market. The effect he described is downward pressure on global growth, which feeds back to the US.
Sri-Kumar's bottom line is that the Fed has started a cycle rather than ended one, that the size of each move is being set by what the White House will tolerate rather than by the inflation data, and that nothing brings long-dated yields down until the Treasury explains how it will spend less or tax more.
Products, Companies & Tools Mentioned
Sri-Kumar Global Strategies (His firm. Its weekly report argued for a 50-basis-point hike the Saturday before the meeting)
The Federal Reserve (Raised to 3.75–4% on a 12-0 vote, with a dot plot he says is internally inconsistent about 2027)
The US Treasury (Scott Bessent's buyback of long-dated bonds, which Sri-Kumar says failed because the 10-year yield was higher after it than before)
Kalshi (The prediction market Lin read the odds from: a 64% chance of exactly two hikes this year. It is also the episode's sponsor)
The Atlanta Fed's GDPNow (Its third-quarter estimate, which he called plausible while arguing the aggregate hides a widening income gap)
Social Security, Medicare and Medicaid (The entitlement programs he says have to be scaled back, starting with a later qualifying age)
Books & Resources Mentioned
Sri-Kumar Global Strategies' weekly report (Where he made the 50-basis-point case the Saturday before the meeting)
The FOMC's September statement and projections (The source of the 3.75–4% target range, the productivity and capital investment language, and the dot plot he says makes no sense)
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