Milton Friedman once wrote that “consumers don’t produce inflation, producers don’t produce inflation, inflation is produced only by too much government spending and too much government creation of money, and nothing else,” and his words feel unusually timely as the United States navigates another delicate phase of its inflation narrative. Rather than blaming corporations or households, Friedman pointed directly to the policy engine room of fiscal expansion and monetary creation, which is once again where today’s pressures originate.
Inflation has eased from its peak, yet the road back to two percent remains uneven. Core services prices are sticky, wage expectations remain elevated, and federal spending continues at historically high levels. These forces are not remnants of pandemic-era disruptions, they stem from ongoing policy choices that exceed the economy’s productive capacity. Still, there is an important counterpoint in the monetary data. Measures of the money supply, including M1 and broader aggregates, are not signaling runaway pressure. M1 has flattened sharply and remains far below its 2021 highs, meaning liquidity alone is not driving today’s inflation. Instead, the disconnect between expansive fiscal policy and a stabilizing money supply has created a murkier inflation outlook than in previous cycles.
Friedman’s framework matters because it pushes the conversation upstream. Businesses adjust prices when input costs rise or when excess money chases limited goods, and consumers spend in response to stimulus, sentiment, and real interest rates. Inflation originates in policy choices, and investors should focus their attention at that level rather than on downstream symptoms.
What Prediction Markets Are Signaling About Rate Cuts
Prediction markets, which aggregate thousands of real-money wagers into forward-looking probabilities, have become one of the most revealing indicators of potential Federal Reserve action. These markets frequently outperform traditional forecasting models, and they are sending an unmistakable signal.
Right now, prediction markets are assigning over an eighty percent probability that the Federal Reserve will deliver a twenty-five basis point rate cut at one of the next three Federal Open Market Committee meetings. They imply two or even three total cuts over the next year, while the probability of holding rates steady has slipped to negligible levels. Traders appear confident that the central bank will begin easing as inflation continues drifting toward target and as real rates exert growing pressure on economic activity.
The Fed itself continues to highlight caution and a data-dependent approach. Even so, real interest rates have climbed materially, and Chair Jerome Powell has acknowledged the risk that overly restrictive policy could slow the economy more than intended, particularly as lag effects accumulate.
A Quiet but Important Factor: Incoming Fed Leadership
There is another important dynamic in play. Powell’s term as Chair concludes in May 2026, and several potential successors have already begun writing guest editorials in the Wall Street Journal, a clear sign that the campaign for influence has begun. Markets understand that a change in leadership could lead to rapid shifts in emphasis, especially around the balance between inflation control, employment objectives, and financial stability. The mere expectation of new leadership adds a subtle but meaningful layer to rate forecasts.
The Fiscal Wild Card
The most significant unresolved risk is fiscal policy. Persistent deficits, structural long-term programs, and election-year incentives can counteract the effects of monetary tightening. A central bank can cool demand by raising rates, yet no central bank can fully neutralize sustained fiscal expansion without creating economic damage. Unless fiscal and monetary policy begin to align, the inflation fight will remain complicated.
The Bottom Line
Friedman’s insight remains relevant because it identifies the true source of inflationary pressure. Prediction markets expect rate cuts, and the Federal Reserve may soon deliver them, yet durable price stability requires coordination among Congress, the Treasury, and the central bank. Without that alignment, even well-timed rate cuts may not close the inflation chapter but instead open its next one.