Shaun Scott No Comments

The Risk of Stagflation in a Rate-Cutting Cycle

A mountain guide can attempt to lead an expedition up a dangerous ascent but cannot force climbers to follow; that requires competence and trust. When the Federal Reserve begins to lower interest rates during a period of persistent inflationary pressure, it risks reviving a specter long thought consigned to the 1970s: stagflation. This toxic mix of stagnant growth, high unemployment, and elevated inflation is particularly dangerous because traditional monetary tools lose effectiveness—the very act of fighting one problem can worsen the other. Bond investors understand these things and are not following the Fed’s lead of an interest rate cut on Wednesday of this week, and are rather demanding more interest for the risk of holding U.S. Treasury debt. What gives?

Sticky Inflation Meets Monetary Easing

Inflation that proves “sticky” tends to come from services, wages, or supply-side constraints rather than one-time shocks like energy prices. These underlying pressures are less sensitive to changes in interest rates. If the Fed eases too early, cheaper credit can reignite demand without resolving supply bottlenecks. The result: inflation plateaus or re-accelerates, rather than falling back to target.

Growth at Risk

Rate cuts are typically intended to cushion slowing growth or avert recession. But if inflation expectations remain elevated, households and businesses may demand higher wages and prices to protect purchasing power. This undermines real growth, erodes consumer confidence, and can deter investment. Instead of stimulating activity, lower rates may trap the economy in a cycle of weak output and sticky price gains.

Lessons from History

The 1970s illustrate how premature monetary easing deepened stagflationary dynamics. Policymakers oscillated between fighting inflation and supporting growth, eroding credibility. It took years of painful tightening under Paul Volcker to reset expectations. Today, while the structure of the economy is different, credibility and expectations remain central. A Fed perceived as too willing to tolerate inflation risks losing its anchor, making policy less effective over time.

Navigating the Trade-Off

The Fed faces a delicate balancing act. Cutting rates too soon could entrench inflation above target, forcing sharper hikes later and increasing recession risk. Waiting too long, however, could exacerbate financial stress and unemployment. Clear communication, credible inflation targeting, and close monitoring of wage and service-price dynamics are essential to avoid repeating the mistakes of the past.

Bottom line: If the Fed eases policy in the face of sticky inflation, it risks trading a short-term growth boost for the longer-term pain of stagflation—a scenario far more damaging and difficult to escape.1

Following the 25-basis point cut in the fed funds rate on Wednesday, Treasury rates rose noticeably across the yield curve.2 These are market rates driven by bond investors, collectively known to be the best economists in the world. This contrary move indicates that bond investors are calling the Fed’s bluff and warning of the risk of stagflation. Stay nimble and may God bless your wealth-building efforts! Shaun

 

“For the LORD gives wisdom; from his mouth comes knowledge and understanding” ~Proverbs 2:6

 

1 ChatGPT, September 19, 2025, “The risk of stagflation if the Fed cuts rates while inflation remains sticky”

2 U.S. Department of the Treasury, September 19, 2025, “Daily Treasury Par Yield Curve Rates”

 

This commentary is provided for informational and educational purposes only and reflects the views of the author as of the date indicated. These views may change at any time and without notice. Nothing contained herein should be construed as investment, legal, or tax advice, nor as a recommendation to buy or sell any security, index, or investment strategy. Certain statements may constitute forward-looking opinions, which are based on current expectations and assumptions; actual results may differ materially due to changes in economic conditions, interest rates, or market dynamics. The information used has been obtained from sources believed to be reliable, but its accuracy and completeness cannot be guaranteed. Past performance is not indicative of future results, and all investing involves risk, including the possible loss of principal.

Old Forge Wealth Management, LLC is a registered investment adviser located in Rhode Island. Registration as an investment adviser does not imply any particular level of skill or training. Additional information about our services can be found in our Form ADV, which is available upon request.

Shaun Scott No Comments

The ‘Perfection Trap’ vs. the ‘Inversion Deliverance’

A fascinating and slightly unnerving aspect of technological advancement (TA) is the fact that everything ever learned is harnessed for further learning, causing the rate of advancement to accelerate continuously towards eventual parabolic growth. The chart resembles that of long-term compounding returns, and both resemble the bottom right quarter of a circle. A less understood phenomenon in the case of ‘TA’ is the inversion which occurs when a particular product or function approaches perfection. Product perfection doesn’t supersede additional learning; it invigorates a more useful process to displace itself! Consider the examples:

  • The 2007 BlackBerry, with its seamless keyboard, instant e-mail syncing, and 3-Day battery life, was dubbed a “CrackBerry” by Wall Street due to executive addiction yet was displaced by the iPhone in 24 months, rendering the stock near worthless; today BlackBerry’s are no longer made.
  • $50 AI-tutors, which package employable outcomes, are actively displacing $50,000 universities, which package credentialed knowledge.
  • The farmer’s milk bucket became a portable, direct feed dumping station, then a direct line to the tank; today robots milk happier cows non-stop for wealthier dairy farmers who have more time and better knees.
  • One needs but a short drive on either U.S. coast today to see the coming inversion of personal transportation. I’m excited to see the far more productive uses transportees will engage during ‘travel time’ as we grow accustomed to self-driving cars.

Josh Baylin, a senior analyst at Stansberry Research, astutely recognizes the greatest danger to a tech company in this redundant process isn’t early on when a company strives to gain market share, but later when “it gets so good at solving the wrong problem that it makes itself irrelevant”. Baylin suggests that in this accelerating, AI-driven tech world it is crucial for investors to identify companies refining nearly perfected processes and allocate less capital to them, and those introducing new processes which eliminate problems and steps and allocate more capital to them.1 Might AI’s voice-first interface alter the human/computer discourse and displace Apple’s nearly perfected iPhone? Is this why Berkshire is reducing its Apple position in noticeable proportions? To what extent are you exposed to the same displacement risk? Can you identify emerging processes that are capable of inverting existing systems and displacing present leaders?

This is an important topic to consider in an age in which parabolic ‘TA’ causes more frequent process inversions and company displacements. Think about it, and may God bless your wealth-building efforts!

Shaun

 

“For the LORD gives wisdom; from his mouth comes knowledge and understanding” ~Proverbs 2:6

1 Stansberry Research, Daily Wealth, “Don’t Get Caught in the Perfection Trap”, by Josh Baylin, April 21, 2025

 

Disclosure(s):

This material is for informational and educational purposes only and should not be construed as investment, tax, or legal advice. References to specific companies or securities are for illustrative purposes only and do not constitute a recommendation or solicitation to buy, sell, or hold any security.

Old Forge Wealth Management, LLC and/or its clients may hold positions in securities discussed. Such positions are subject to change at any time without notice. Information from third-party sources is believed to be reliable; however, we cannot guarantee its accuracy or completeness, and the views expressed by third-party sources are their own and do not necessarily reflect the views of Old Forge Wealth Management, LLC.

Forward-looking statements reflect our current views and assumptions and involve risks and uncertainties; actual outcomes may differ materially. Investing involves risk, including the potential loss of principal. Past performance is not indicative of future results.

Old Forge Wealth Management, LLC is a registered investment adviser located in Rhode Island. Registration as an investment adviser does not imply a certain level of skill or training. Please consult your tax or legal professional regarding your specific situation.