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The US Federal Reserve cut interest rates 25 basis points, or 1/4 of one percent, today as expected.  And, they signaled that more rate cuts are ahead.

This is the fourth interest rate cut in 12 months.

The reason the Fed cut rates is supposedly because of the weaker employment data and not because the inflation rate had reached its 2% target.  As we suggested last time, the Fed usually puts employment as a priority over the control of inflation.

However, political pressure on the Fed by President Trump may also have been a factor. They felt they had to give him “something”.

As the chart shows, things are not going according to plan.  Usually, when the Fed cuts, it sets the direction of rates, even if market rates do not precisely track the Fed rate click for click.

The first entry is the cut today, and you can see that since September 2024, the Fed has cut rates four times, resulting in a total reduction of 1.25%.

We show the yield on both the bellwether 10-year Treasury bond and the 30-year, which is typically closer to 30-year mortgage rates.

Note that approximately one year ago, the yield on the 10-year was 3.7%, and on the 30-year, it was 4.03%.  Now we are one year later, and after four cuts, the yield on the 10-year is 4.06% and the 30-year is 4.66%.  In short, rates have not gone down; they have not even been flat; instead, they are rising against the commands of the central bank.

There are two questions investors need to ask themselves: Why are rates going in the opposite direction of the Fed’s commands, and what does that opposite movement mean to markets and the economy?

As to the first, the Fed has likely lost some credibility on the inflation front, and hence, bond traders want a higher yield to protect themselves. And we have the aforementioned pressure from the Trump Administration.  But, interestingly, this is not likely the reason for the perverse action in the bond market.

The reason we say that is that the same thing and more is happening in other countries, such as Switzerland, the UK, the EU, Sweden, and many other countries. Over the past 12-month period, foreign central banks have actually been well ahead of the Fed in cutting rates.  In many cases, this was before Trump became President, and besides, foreign central banks would not follow his jawboning anyway.

Over the past year (September 18, 2024, to September 18, 2025), foreign central banks (excluding the US Federal Reserve) have collectively performed approximately 150 individual rate cut actions.

In almost all cases, their bond markets have also fallen (rates have risen), contrary to the instructions of their central banks.  Have all central banks lost their credibility?   In Japan, rates have risen sharply to a 17-year high on the 10-year JGB, in the midst of a global rate-cutting environment. 

Regarding the second problem for investors, it means that the supposed benefits of lower rates, faster economic growth, and reduced burden on governments, corporations, and individuals to finance their debt, as well as the problems in the global real estate market, will not be realized.  Simply put, if rates don’t go down but instead go upward, all the investors hoping for lower rates are going to be disappointed.

It may also mean that there is a false confidence that central banks can “control” interest rates, a myth that, once shattered, could have enormous consequences.

The reason for all of this is intriguing, and we can only speculate with others, but what is likely most important is to realize that rates are not coming down in major economies around the world, despite the efforts of their central banks. That means the benefits of lower rates will not be seen, but the pain of rising rates will be seen.

Our quick take is that most advanced governments have designed welfare states and are stuck with late-cycle consequences. Their social entitlement and pension programs are all facing bad demographics.  The number of the elderly is exploding, and their healthcare costs are increasing as life expectancies rise. The number of young people coming into the system is collapsing.

It shows that the dividing line between a social welfare state and outright socialism may not be as bright and obvious as once thought.  Once a country has 80% or so of its budget on “automatic pilot”, demographically dominated social entitlement programs are no longer under the effective control of legislators or the executive, but in the hands of unelected bureaucrats. The entitlement tail begins to wag the economic dog.

Moreover, the response by many politicians is to add more entitlements to the ones already draining the treasury.

No one will have the political stones to rein them in. Even the most modest proposals, like raising the retirement age commensurate with longer life spans, get immediate political blowback and then capitulation.

The gamble many nations took was that by importing new workers through mass migration, they could achieve a better demographic balance, allowing them to continue their socialist welfare states.  The cultural and religious problems of integrating people from other cultures are a huge problem.  But that aside for the moment,  many immigrants are winding up on social welfare and actually costing the system more.  Thus, deficits are being driven ever more extreme, and the government must finance those deficits by flooding the markets with bonds.

Some contend that this, too, was deliberate, a scheme to import new voters devoted to the party that brought them in and gives them benefits.

According to GROK AI, in the UK : “According to the Office for National Statistics (ONS), about 48.6% of Muslims aged 16-64 were employed in 2021, the lowest among religious groups, compared to 62.8% for the overall population. This leaves a significant portion either unemployed or economically inactive (i.e., not seeking work, such as students, retirees, or those caring for family members). Specifically, in 2018, 5.7% of Muslims were unemployed, and around 38% were economically inactive, totaling roughly 44% not in work. For Muslim women, the figures are starker: 16% unemployed and 58% economically inactive in 2015, though this improved slightly by 2018.”

If the bet on imported workers does not pay off as expected, then the revenue expected from their employment will not go into the system, and in fact, they may have made the situation worse.  Entitlement programs are like economic fly paper.  Once attached, a political constituency develops to keep them on the welfare rolls.

All of this has to be paid for by either taxation, debt issuance, or inflation.  Likely, we will get all three in some combination.

Taxation and inflation create political blowback—bond issuance, less so, because who really directly feels that?

The latter depresses bond prices, which is another way of saying, it forces interest rates in the opposite direction of what is intended by central banks.

Add to these financing pressures the threat of war and the widespread rearmament taking place globally.  That costs money as well, and governments must meet those expenses in addition to the ever-increasing interest rate payments on their individual countries’ national debt.  The “peace dividend” after the fall of Soviet Communism has run its course, and the world, by necessity, is going back on a war footing.

In short, the entire world is stuck in a debt trap where the amount of debt and the cost to finance it are rising much faster than population and productivity. That means more debt to be swallowed by the world’s investors.

If those limits are breached, then central banks could well step in again and repurchase bonds (Quantitative Easing).  However, where do the central banks get the funds to purchase the excess supply?  They create the money out of thin air, and then try to keep the inflationary creation on the balance sheets of banks.  The risk, of course, is that it distorts the real rate of interest and the new liquidity tends to leak into the economic system, exacerbating inflation, mostly financial asset inflation but some consumer inflation as well.

Given the global politics and the established socialists in most countries, there is little hope unless a revolution occurs at the polls.  In Europe, it looks like such a political upheaval is in the making.  But as deserved as it is, new leaders will be faced with the same problems and political forces created by the ones they forced out of office. New leaders will have difficulty because income and growth can fluctuate, but debt keeps growing.  Moreover, “reform” candidates fear the political blowback of austerity and cutting benefits as much as the socialists.

The Trump Administration is a good example.  They have opted to “grow our way out” of the debt crisis, rather than cut benefits. It remains to be seen if growth can overcome the depressing effects of rising interest rates.

The fear of stagflation, slow growth, and persistent inflation also signals to investors that they must demand a premium yield to take the risk of buying bonds. No government is issuing stable money.

So, as to the question posed: Why are rates rising all over the world in defiance of their respective central banks, the answer boiled down is “socialism.”

Socialism has many internal contradictions that make it an unstable economic system. It makes people dependent on the state, causing them to fail to take the necessary personal actions to prepare for their own retirement and healthcare.  Politicians want people dependent on the state to make reliably partisan voters. It calls for the redistribution of wealth, which undermines incentives to work and produce, and favors those who consume with government money.

Under current socialist policies, asset inflation has been much higher than wage inflation.  That means the economic class (the rich) that can afford to own assets does very well, while wage earners with no tangible assets do very poorly.  This has created an ever-widening “wealth gap”, which endangers the social fabric.  But the contradiction is that socialist policies were supposed to reduce the wealth gap, but instead, they have made it worse. We are now seeing extreme manifestations of this problem.  The latest retail sales showed that half of all consumption came from just 10% of the population, the wealthy.  Confiscate the money from the rich, and you buy yourself a depression. 

This wealth gap, as shown above, really accelerated after the crash of 1987, and the constant central bank efforts to fight recession and deflation with cheap money and low interest rates.  This started the massive asset price inflation that favors those wealthy enough to own assets. One could also argue that these policies were the Fed simply being the enabler to the Congress and their warfare/welfare state policies that emerged, particularly after 9/11, the subsequent forever wars, and then the disastrous COVID lockdown.

Cultural socialism comes with the package of socialist ideas, and socialism has always hated the nuclear family and children in general.  They have been widely successful in causing birth rates to collapse well below replacement levels in almost all nations. Only those in sub-Saharan Africa have birth rates above replacement. Population collapse means less demand to buy things.

Cultural socialism also argues that income differences are not a natural product of variations in intelligence, drive, grit, and the ability to save (deferred gratification), but are due to race, ethnicity, sex, and systems of power.  Therefore, rewards “should” go equally, despite massive differences in individual productivity.

DEI policies flow directly from cultural socialism. Everyone gets the equivalent of an economic participation trophy, just for being alive.  The result is economic stagnation, the promotion of the poorly prepared, when the system needs as much growth and productivity as possible to pay for all the past excesses.

The bond markets are signaling that the industrial world has a long-term debt crisis, and that it is expected to worsen.  We are likely to experience a chronic oversupply for years, with constant pressure on central banks to monetize debt by printing money.

Thus, currency depreciation will likely continue, and, increasingly, weakening bond ratings (the confidence the market has that debt will be repaid) will add more anxiety to the markets.

The internal contradictions of socialism will lead to a rise in interest rates and inflation, which will threaten the entire edifice of debt, creating instability and a lack of a clear path out of the mess.

*****

Charts are from CHATGPT, StockmarketNews.com, Elliot Wave International, Federal Reserve Bank of St. Louis.