Current Policy Is Destabilizing A Stable U.S. Economy

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  Business and Finance on Sun, Aug 31st, 2025 by Forbes

How the Current Monetary and Fiscal Mix is Undermining a Resilient U.S. Economy

By Hersh Shefrin – Forbes, 31 August 2025

The United States is often hailed as the world’s most stable economy, buoyed by a strong labor market, resilient consumer spending and a robust corporate sector. Yet, despite these fundamentals, the article “Current policy is destabilizing a stable US economy” argues that the prevailing mix of monetary and fiscal actions is actively eroding that stability. Shefrin, an analyst known for his skeptical view of mainstream policy narratives, unpacks how the Federal Reserve’s aggressive tightening, coupled with certain fiscal choices, is setting the stage for a slowdown—and why this trajectory may be self‑defeating.

1. The Fed’s “Hawkish” Momentum

Shefrin opens with a critique of the Federal Reserve’s “policy mix,” which has been heavily weighted toward inflation control. In the first half of 2025, the Fed raised the federal funds rate by 150 basis points, bringing the policy rate to a 20‑year high of 5.25 %. The bank’s balance sheet has also contracted by roughly $900 billion since its peak, signaling a shift from the large‑scale asset purchases that had supported the economy during the pandemic.

He points out that while the inflation rate—measured by the core Personal Consumption Expenditures (PCE) index—has slipped back toward the Fed’s 2 % target, the volatility of inflation expectations remains high. The article cites a recent survey by the Federal Reserve Bank of San Francisco, which shows that 64 % of households expect inflation to stay above 2 % for the next year, a sharp uptick from the 47 % figure reported in March.

The Fed’s policy moves have also pushed bond yields to levels not seen since the early 1990s. The 10‑year Treasury yield rose to 3.75 % in late July, a level that, according to Shefrin, is starting to strain corporate financing and increase borrowing costs for consumers. While higher rates help curb inflation, the article stresses that they also dampen investment and dampen the growth of sectors that rely on low‑cost debt, such as real estate and technology.

2. Fiscal Actions That Add to the Pressure

Shefrin then turns to the fiscal side of the equation. The U.S. Treasury has continued to roll out a series of short‑term stimulus measures—particularly a $40 billion expansion of the child tax credit and a $70 billion stimulus package for infrastructure and green energy. While these programs have injected trillions into the economy, they have also added to the country’s fiscal deficit.

According to the Congressional Budget Office (CBO), the combined deficit for the 2025 fiscal year is projected at $2.8 trillion—an increase of 8 % from the previous year. Shefrin argues that the CBO’s 2026 forecast predicts a further rise to $3.2 trillion, a trend that could lead to higher government debt servicing costs as interest rates climb.

The article also references a Brookings Institution analysis that suggests that high debt levels, when coupled with tightening monetary policy, can create a “debt‑overhang” effect. Essentially, businesses and households face higher debt servicing costs, which reduces discretionary spending and can lead to a contraction in aggregate demand.

3. The “Policy Lag” and Its Consequences

Shefrin’s core argument rests on the concept of a “policy lag.” Monetary policy, he explains, is notoriously slow to transmit through the economy. By the time the Fed’s rate hike is fully incorporated into the financial system, the economy may have already started to feel the squeeze. Adding fiscal stimulus to the mix compounds this lag. If the Fed’s tightening reduces inflation expectations and, in turn, dampens spending, but the fiscal stimulus is still buoying the economy, the net effect can be a mismatch that creates instability.

He uses the example of the housing market: While lower mortgage rates in 2023 helped spur home sales, the rapid rate hikes in 2025 have pushed 30‑year fixed mortgage rates above 7 %, eroding affordability. As a result, first‑time buyers are staying off the market, and housing starts have slowed by 2.5 % YoY, according to the U.S. Census Bureau.

4. Global Context and the Dollar’s Role

The article does not ignore the global backdrop. Shefrin notes that the U.S. dollar has surged against major currencies, reaching a 13‑month high against the euro. A stronger dollar can hurt U.S. exporters by making goods more expensive abroad, which in turn can put downward pressure on corporate earnings. The article references an IMF report that suggests that a significant portion of the U.S. trade deficit may be driven by dollar strength, especially in commodity-rich economies like Brazil and Russia.

Moreover, the tightening cycle in the U.S. has had ripple effects in emerging markets. As capital flows into the U.S., foreign exchange reserves in countries like Turkey and Argentina have been under pressure, leading to currency volatility that can indirectly affect U.S. import prices and, by extension, inflation.

5. A Call for a Balanced, Data‑Driven Approach

In his closing remarks, Shefrin urges policymakers to adopt a more balanced and data‑driven approach. He proposes that the Fed consider a “graduated” policy path—tightening rates incrementally while closely monitoring inflation expectations and employment data. He also suggests that fiscal authorities adopt a “counter‑cyclical” stance: reduce spending in periods of overheating and increase it when the economy shows signs of cooling.

Shefrin’s article concludes by underscoring the resilience of the U.S. economy: “The underlying fundamentals—strong labor market, solid corporate profits, and a resilient consumer base—are not yet eroded. The danger lies in policy choices that can undo that resilience.” He calls on both the Fed and Congress to coordinate more closely, to mitigate the policy lag, and to preserve the stability that has long defined the American economic narrative.

Key Takeaways

Shefrin’s analysis serves as a warning that the United States’ “stable” economy may be more fragile than it appears. In an era of rapid policy shifts and global economic uncertainty, the need for careful, coordinated action has never been clearer.