Despite Treasury yields moving higher and economic data indicating a healthy economy, traders are betting that the Federal Reserve will lower interest rates more this year and throughout 2025. Investors believe inflation will continue to move toward the Fed's preferred 2% target. The Fed can then focus on the labor market and lower interest rates to achieve the highly sought-after soft landing scenario.
Recently, however, billionaire investor Paul Tudor Jones, who has successfully managed the hedge fund Tudor Investment Corporation for four decades, went on CNBC and said, "All roads lead to inflation." The two messages seem to contradict one another, because the Fed probably wouldn't have a lot of room to lower interest rates if inflation reignited. But could both the market and Jones be right? Let's take a look.
A look at the national debt
The Fed's two mandates are to support stable prices and maximum employment. However, according to Jones, the country's finances will overshadow these goals, especially considering that both presidential candidates are proposing policies that could drastically increase spending and the federal deficit, which occurs when the government spends more money than it takes in. The federal deficit ballooned to more than $1.8 trillion in fiscal year 2024, which is 8% higher than the prior fiscal year.
The total national debt is closing in on $36 trillion. A number like this can be difficult for people to wrap their heads around and there are certainly experts that might suggest it's still manageable. However, the U.S. spent 17% of its total budget in fiscal 2024 on debt interest payments. If interest rates rise, the cost of maintaining the debt will increase as well because the U.S. Treasury Department has to issue new Treasury bills at higher interest rates.
This is the crux of Jones' argument. He said on CNBC, "We are going to be broke really quickly unless we get serious about dealing with our spending issues." If the buyers of U.S. Treasury bills ever doubted the U.S. government's ability to pay its debt, they might require higher interest payments, which would likely lead to a big decline in bond prices and a surge in yields. Tudor Jones' prediction echoes a similar call I covered from billionaire investor Stanley Druckenmiller, who warned of fiscal recklessness and said he is making bets against Treasury bonds.
Current U.S. debt-to-gross domestic product is at 124%. Some experts believe this ratio would be untenable once it reaches 200%. The government could then default on its debt in a way that has not been seen before. Jones said the U.S. will essentially have to inflate itself out of these fiscal issues. His playbook calls for the U.S. to:
- Impose a small tax on the consumer
- Run interest rates below inflation
- Produce nominal macroeconomic growth above inflation
- "Run the most dovish monetary policy that we can without allowing inflation to become too much of a tax on the citizenry."
How Tudor Jones is playing this situation
While one wouldn't expect the Fed to lower interest rates if there were serious concerns about more inflation, Jones and others believe the Fed has no choice, given that leaving interest rates higher for longer would extrapolate debt issues even more. That's why all roads may lead to inflation and the Fed may need to be dovish and cut interest rates anyway.
Jones said he is investing in gold, Bitcoin , and commodities as hedges against inflation, and believes most young people have been able to hedge inflation by buying tech stocks in the Nasdaq Composite . Jones is not alone. The price of gold futures is up nearly 32% this year and fiscal uncertainty may be one of the contributing factors.
It's often hard for investors to think about the national debt, given that it has now risen for decades, but Jones is making some good points here and investors may want to pay attention.
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