Anniversary: Three years, what we got right

This column was launched in September 2022, and three full years on it has checked its main macroeconomic calls against what actually happened. The result is awkward for Wall Street. The consensus kept forecasting a perfect soft landing. The column's focus on strained balance sheets, supply constraints and fiscal dominance turned out to be consistently right.

Where things stood in 2022

The starting point is worth recalling. American consumer price inflation had peaked at 9.1 per cent in June 2022, and the Federal Reserve was in the middle of the fastest run of rate rises since the early 1980s, with successive increases of three-quarters of a point. In Britain, the gilt market was days away from the crisis set off by an unfunded mini-budget, which forced the Bank of England to buy long bonds to rescue pension funds. The idea that fiscal policy could overwhelm monetary policy had stopped being theoretical.

That summer Washington also passed the Inflation Reduction Act and the CHIPS Act, committing large federal subsidies to clean energy and semiconductor factories. Both pulled private capital into physical investment at the same moment that higher rates were raising its cost. The combination of industrial policy, large deficits and a labour force still recovering from the pandemic set the terms for the next three years.

Checking the old calls

Three years ago markets were pricing peak policy rates below four per cent and expected inflation to disappear without pain. The column argued that tight labour supply, capital spending on the energy transition and loose fiscal policy would hold long-term borrowing costs at multi-year highs. Today the ten-year Treasury yield is well above four per cent and monthly job growth has slowed to 22,000. The economy has followed the column's framework, not the consensus models.

The path between the two points was not smooth. The Fed kept raising rates until July 2023, when its benchmark reached 5.25 to 5.5 per cent, far above the peak markets had priced. In October that year the ten-year yield briefly touched 5 per cent, a level unseen since before the 2008 crisis, as investors demanded more compensation for holding government debt. The Fed began cutting only in September 2024 and paused again after December, leaving short rates well above anything seen in the decade after 2008.

Balance sheets under strain

The first cracks appeared where the column expected them. In March 2023 Silicon Valley Bank failed after losses on long-dated bonds, bought when yields were low, collided with a run by uninsured depositors. Signature Bank and First Republic followed, and the Fed opened an emergency lending facility to stop the contagion. The losses were a direct consequence of the shift from free money to positive real rates, and they were concentrated in institutions that had assumed the old regime would last.

Sovereign balance sheets took the next hit. Fitch removed America's AAA rating in August 2023 and Moody's followed in May this year, leaving no major agency with a top rating on Treasury debt. Both pointed to persistent deficits and the rising cost of interest, which now exceeds spending on defence. The tax and spending law signed on 4 July extends that trajectory rather than correcting it.

What the column got wrong

An honest audit has to count the misses. The American economy proved far more resilient than a strained-balance-sheet framework implied. Consumers kept spending through 2023 and 2024, unemployment stayed close to half-century lows for much of the period, and there was no recession. Equity markets, led by a handful of technology companies riding the boom in artificial intelligence, repeatedly reached records. Anyone who used the column's framework to stay out of shares missed a large rally.

The reasons are instructive. Households and companies had locked in low fixed rates on mortgages and bonds before 2022, so higher policy rates reached their budgets slowly. Government deficits kept incomes flowing, which is fiscal dominance working in the economy's favour in the short run. The framework was right about the direction of the pressures and wrong, at times, about how quickly they would bite.

Supply constraints return

The past year has brought the column's other theme back into focus. Tariffs imposed since April under emergency powers have raised the cost of imported goods, and the appeals court ruling against them last week adds legal uncertainty on top of economic friction. Immigration curbs have slowed growth in the labour force, so the economy can add fewer jobs without pushing up unemployment. August's payroll gain of 22,000 reflects weak demand and thinner supply at the same time.

Supply shocks of this kind put central banks in an uncomfortable position. Weak hiring argues for cuts, while tariffs and a tight labour supply keep inflation above target. The Fed looks set to cut this month regardless, but long-term yields have not fallen with short-term ones, which suggests investors are demanding more for holding duration in a world of large deficits and political pressure on the central bank.

Capital is no longer free

The main lesson of the past thirty-six months is that the world economy has left behind, probably for good, the post-2008 regime of free money and frictionless trade. The pressures that defined the last three years (large deficits, contested trade, constrained labour supply) are policy choices that no government currently shows signs of reversing.

The indicators that would test the framework are measurable. Demand at Treasury auctions of long bonds, the gap between ten-year and two-year yields, and market-based measures of inflation expectations will show whether investors keep charging more for duration as the Fed eases. If long yields fall in step with policy rates, the old regime is reasserting itself; if the curve keeps steepening, it is not.

The risk to that view is a sharp downturn. A recession would push inflation down, allow the Fed to cut much further and briefly revive the old regime of low yields. Even then, deficits would widen further, and the term premium on long bonds would probably stay higher than in the 2010s. Three years of calls bear out the column's starting premise. Companies can no longer count on easy money and global supply chains to lift profits, and investors will have to allocate capital through years of fiscal and policy friction.