The market expects the Fed to start hiking again, but its ability to actually do so is severely limited. One more hike may come as a gesture to show the Fed’s independence, but it won’t bring inflation back to target.There’s a lot of chatter right now about whether the Federal Reserve is about to start raising rates again. Kevin Warsh’s first meeting as chair came and went with a unanimous hold at 3.5–3.75%, but the dot plot quietly nudged the median for this year up to 3.8%, erasing the cuts that had been penciled in back in March. The market took the hint and began pricing in a hike this year.We think this misses the more important question. Whether the Fed should raise rates or not is always debatable. Above-target inflation may warrant a hike; the opposing case holds that the Fed should look through an energy-driven shock, and perhaps ease further given weak consumer sentiment. The more important question is what a hike does to federal finances, and how long that posture can hold. Through that lens, the rate-hike debate is a second-order concern.Let us walk through why.Start With the NumbersFederal debt is around $39 trillion. Net interest on that debt is now running over $1 trillion a year, about 3.3% of GDP. The rapid accumulation of federal debt, in addition to higher interest rates on that debt (relative to longer-term rates that existed just a few years ago), has pushed up the federal government’s cost of borrowing. Interest costs so far in FY26 have been the second-largest spending category for the federal government, outpacing outlays for all budget categories except for Social Security.The debt doesn’t reprice all at once. It rolls over gradually, as old securities mature and get replaced at whatever the going rate is. But over the full refinancing cycle, every 100 basis points of higher funding cost adds roughly $390 billion to annual interest expense. This is a permanent addition to the deficit, year after year, that itself has to be financed with more borrowing.Since COVID, the U.S. has shifted financing heavily toward T-bills: in 2025, 84% of government debt issuance was made up of Treasury bills with maturities of 12 months or less, the highest ratio since the financial crisis.T-bills now represent 22% of all outstanding marketable Treasury debt, above the historical 15–20% target range the TBAC has historically recommended. By issuing fewer 10Y and 30Y bonds, the Treasury reduces the volume of long-duration supply that must be absorbed by price-sensitive buyers, relieving upward pressure on long-end yields.But this carries a risk: over-reliance on securities with maturities of less than 12 months increases the U.S. debt’s sensitivity to Fed interest rate policy. Short-term bills must be constantly rolled over at prevailing rates, if rates stay elevated, refinancing costs accumulate rapidly rather than being locked in at long-term fixed rates.In other words, higher rates directly enlarge the deficit, which forces more issuance of federal debt, the opposite of what a central bank fighting inflation wants to see. The fiscal side is pumping money into the economy at the very moment the monetary side is trying to drain it. Past a certain level of debt, raising rates becomes a stimulus channel as much as a brake, and the two arms of policy start working against each other.So What About That Hike?This is why we’d take the dot plot’s drift to 3.8% with a grain of salt. The committee may well deliver one more hike this year. But we’d read it as a gesture, not the start of a cycle.A single hike does something useful for a new chair: it demonstrates independence. Warsh was appointed by a president who has made no secret of wanting lower rates. A single hike into above-target inflation is the clearest way to signal that the Fed still answers to its mandate and not to the White House.No matter what the Fed decides at any given meeting, the fiscal side will still run hot. The deficit keeps stimulating the economy, and inflation will stay structurally above 2%. The Fed is boxed in by the conflicting effects of monetary and fiscal policy. The most likely path is a high plateau in nominal terms: rate held at a relatively high level, maybe one symbolic hike, and an inflation rate that will persistently be higher.For investors, the implication isn’t about the next 25 or even 50 basis points raise. It’s that real yield will consistently be capped by the need to keep the government solvent. From an asset allocation perspective, this is the baseline bull case for scarce assets, such as gold and bitcoin, even though both have sold off sharply in the current market as rate-hike fears intensify.Disclaimer: The information provided herein does not constitute investment advice, financial advice, trading advice, or any other sort of advice, and should not be treated as such. All content set out below is for informational purposes only.