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* FIEND'S SUPERBEAR MARKET REPORT *

* August 14, 2026 *

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* e-mail: fiendbear@fiendbear.com *

* web address: http://www.fiendbear.com *

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Fiend Commentary
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Two Percent in Words, $6.76 Trillion in Deeds

Thursday’s PPI report gave Wall Street exactly what it needed—not low inflation, but inflation that failed to get any worse for one month.

Producer prices were unchanged in July, compared with expectations for a 0.2% increase. The annual rate slowed from 5.5% to 4.7%, which sounds encouraging until one remembers that 4.7% is still nowhere near the Federal Reserve’s stated 2% goal.

The internals were not especially comforting either. Goods prices fell 0.7%, largely because of lower energy costs, while service prices rose 0.2%. More importantly, producer prices excluding food, energy and trade services increased 0.4% in July and were also up 4.7% from a year earlier. The inflation relief came largely from falling oil and gasoline prices rather than a broad return to price stability.

That was good enough for Wall Street.

The chance of a September rate hike fell to approximately 35%, down from 40% after Wednesday’s CPI report and 55% only a week earlier. The dollar briefly fell below 99.80 before recovering toward 100, while the S&P 500 moved to another record.

The supposedly near-certain rate hikes are disappearing almost exactly as expected.

From Certain Hikes to Almost No Hike

Only a few weeks ago, the futures market was assigning probabilities of 80% or 90% to a Fed increase before year-end. Some traders were even discussing multiple hikes.

Then the economy lost jobs in July.

CPI came in close to expectations.

PPI was unchanged.

Nothing in those reports suggested that inflation had returned to 2%. They merely gave the Fed enough room to avoid acting.

That is all Wall Street ever needed.

The progression has become predictable:

September was almost certain.

Then September became a coin flip.

Now September is down near one chance in three.

October will soon become the “real” meeting.

Then December.

Then no hike at all in 2026.

One more weak employment report could bring back discussion of rate cuts in early 2027. A sufficiently poor report could bring that conversation forward even faster.

The CME probabilities have not predicted Fed policy particularly well this year. They have measured the market’s latest emotional response to each report. Cuts became holds. Holds became hikes. Hikes became near-certainties. Now those certainties are evaporating.

The probabilities may still serve a useful purpose for the Fed. As long as investors believe a hike remains possible, the dollar receives some support, metals face resistance and financial conditions stay tighter than they otherwise would.

Warsh gets part of the effect of a rate hike without accepting the political and economic consequences of delivering one before the midterms.

The Fed talks.

The market does some of the tightening.

And the actual policy rate remains unchanged.

The Balance Sheet Is Moving in the Other Direction

While Fed officials continue talking about 2% inflation and possible rate increases, the balance sheet rose again.

Total Federal Reserve assets increased by approximately $11.4 billion during the latest week, reaching $6.760 trillion. Total assets are now about $116 billion higher than they were a year ago. Securities held outright increased by roughly $8.3 billion during the week, including an $8.3 billion increase in Treasury holdings.

It would be inaccurate to call every weekly increase quantitative easing.

The Fed formally ended balance-sheet runoff in December 2025 after concluding that reserves had reached an “ample” level. It began rolling over maturing Treasuries and reinvesting agency-security proceeds into Treasury bills. The Fed describes the more recent purchases as reserve-management operations rather than economic stimulus.

Technically, that distinction matters.

Directionally, the message is still obvious.

The period of quantitative tightening is over.

The balance sheet is no longer shrinking.

Treasury holdings are rising again.

The Fed is talking about tighter policy while maintaining and gradually expanding the monetary infrastructure that supports abundant liquidity.

This is not the massive QE of 2020. But it is difficult to describe it as a central bank aggressively trying to remove accommodation from the system.

The Fed is attempting to achieve 2% inflation with one hand while ensuring that reserves remain plentiful with the other.

The bond market may be wondering which hand matters more.

The Next Rescue Will Almost Certainly Be Larger

The larger issue is what happens during the next recession or financial-market breakdown.

There is little reason to believe the Fed will permit a severe contraction to proceed without intervention. If unemployment rises sharply, private credit freezes, margin calls spread through stocks or the Treasury market begins malfunctioning, the Fed will use the tools it has used before:

Rate cuts.

Emergency lending facilities.

Repo operations.

Dollar swap lines.

Treasury purchases.

Mortgage-backed-security purchases.

Some new acronym designed to sound temporary and technical.

The 2020 response shows how quickly the balance sheet can change. Fed assets rose from approximately $4.3 trillion in mid-March 2020 to nearly $7.2 trillion by early June, an increase of almost $3 trillion in less than three months. By the end of 2020, the balance sheet was around $7.4 trillion, and by September 2021 it had climbed to almost $8.5 trillion.
A proportional expansion similar to the initial 2020 response would take today’s $6.76 trillion balance sheet above $11 trillion.

That is not a forecast. The next crisis will not necessarily resemble the pandemic, and the Fed could design a smaller or more targeted response.

But it illustrates the scale involved.

The nominal economy is larger.

Federal debt is much larger.

Stock-market capitalization is much larger.

Private credit is much larger.

The Treasury market must absorb much more issuance.

And investors have become more dependent on the belief that the Fed will protect asset prices and market functioning when conditions deteriorate.

A $500 billion intervention that once looked enormous might now be treated as little more than a temporary liquidity operation.

Each rescue establishes the starting point for the next rescue.

More Money for Less Effect

That is where diminishing returns may become the central problem.

The first round of QE after the financial crisis was considered extraordinary. Later rounds became familiar. The pandemic response was several times larger and arrived within weeks.

The interventions worked in the sense that markets stabilized, credit continued flowing and asset prices recovered.

They also encouraged additional leverage, larger federal deficits and even greater dependence on cheap financing.

The system that emerges from each rescue becomes harder to support without another one.

More debt requires more refinancing.

Higher asset values require more liquidity to prevent forced liquidation.

Larger speculative bubbles create larger potential losses.

Bigger Treasury auctions require more buyers.

The next rescue may therefore need more money merely to create the same psychological effect.

At some point, markets may stop reacting to a trillion-dollar program as an overwhelming force and begin treating it as the minimum expected response.

That is when the Fed’s credibility problem becomes much more serious.

The Dollar May Not Collapse All at Once

Repeated balance-sheet expansion does not guarantee that the dollar suddenly becomes worthless.

The dollar retains enormous structural advantages. It remains the primary reserve currency, the Treasury market remains the world’s deepest government-bond market, and much of global trade and debt is still denominated in dollars.

Those advantages can preserve demand for the currency much longer than skeptics expect.

But reserve-currency status is not the same thing as permanent purchasing-power protection.

The dollar can decline gradually through inflation.

Foreign reserve managers can diversify slowly.

Trade can increasingly be settled in other currencies.

Investors can demand higher Treasury yields as compensation for currency and inflation risk.

The dollar does not need to collapse overnight for dollar holders to suffer a substantial long-term loss.

The more likely danger is slow erosion interrupted by sudden confidence shocks.

The dollar index is already struggling to hold 100 despite long-term U.S. interest rates near multi-decade highs. Normally, yields above 5% on long Treasury bonds should make the currency extremely attractive.

If the dollar cannot sustain a major rally with those yields, what happens when the Fed begins cutting rates and expanding the balance sheet again?

QE May No Longer Control the Long Bond

The traditional assumption is that the next recession will bring lower interest rates across the curve.

The Fed cuts the overnight rate.

It purchases Treasury securities.

Bond prices rise.

Long-term yields fall.

Mortgage and corporate borrowing costs decline.

That sequence worked reasonably well when inflation was low, federal debt was smaller and investors believed the balance-sheet expansion would eventually be reversed.

The next cycle may behave differently.

The Treasury sold 30-year bonds Thursday at a yield of approximately 5.216%, the government’s highest 30-year borrowing cost since 2001. That occurred after a weak employment report, a friendly CPI report and an unchanged PPI reading—exactly the kind of data that should normally reassure the bond market.

The fiscal backdrop is making the long end harder to control. July produced a federal deficit of $432 billion, bringing the fiscal-year-to-date deficit to $1.799 trillion with two months still remaining. The current-year deficit has already exceeded the entire fiscal 2025 shortfall.

If the Fed begins buying Treasuries aggressively while federal borrowing remains enormous and inflation is still above target, long-term investors may see the purchases as monetary financing rather than temporary crisis management.

The Fed could cut short-term rates while the 10-year and 30-year yields remain high—or even rise.

That would steepen the yield curve dramatically:

The short end would reflect recession and Fed cuts.

The long end would reflect inflation, debt supply and declining confidence.

The Fed could purchase even more long-term bonds to suppress those yields, but that would require still greater balance-sheet expansion and could place additional pressure on the dollar.

More purchases would create more concern.

More concern would require more purchases.

That is the monetary version of a debt spiral.

The Inflation Target Is Becoming Ceremonial

The Fed continues to say that 2% inflation is nonnegotiable.

But PPI is 4.7%.

CPI is 3.4%.

Core CPI is 2.5%.

Core PCE was 3.3% in June.

The Fed has been above its target for more than five years, yet each report that fails to show a new acceleration is treated as evidence that policy is working.

At some point, 2% stops functioning as an actual target and becomes a ceremonial number recited at press conferences.

The practical target may be closer to:

Inflation high enough to reduce the real value of debt.

But not high enough to cause immediate panic.

Growth weak enough to prevent rate hikes.

But not weak enough to crush corporate earnings.

Markets expensive enough to support confidence.

But not so unstable that the Fed must intervene again.

That is a very narrow corridor.

The Next Recession Will Reveal the Real Policy

The PPI report bought the Fed another month of inaction.

The September hike is fading.

The pre-midterm hike is becoming less likely.

The balance sheet is already moving higher before a recession has even arrived.

The next downturn will reveal whether the Fed’s commitment is really to 2% inflation or to preventing asset markets, credit markets and federal financing from breaking.

History suggests the second objective will win.

The first balance-sheet explosion was justified as an emergency.

The next one will also be justified as an emergency.

The difference is that it will begin from $6.76 trillion rather than $4.3 trillion, with federal debt near $40 trillion rather than $23 trillion and with long-term yields already above 5%.

The Fed may once again rescue nominal asset prices.

It may once again keep the financial machinery operating.

It may once again prevent a liquidation from becoming a depression.

But the cost may increasingly appear in the currency and the long bond.

The next QE program may save the market.

It may not save the dollar’s purchasing power.

And it may finally demonstrate that the Fed can create unlimited money—but not unlimited confidence.

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