Understanding the Fed’s Rug Pull | KNOW THIS ASAP

all right fed terminal rate right here

5.36 this is down from about that one or

a 5.4 level uh that we recently hit you

could see that terminal rate really

skyrocketed after that January data and

February data here you can see the

January hot jobs data and Hot Market

data really started coming out leading

to the skyrocketing of expectations for

rates going into the banking crisis

banking crisis resets those expectations

and then we've slowly started trending

back up to a 5.36 which 5.36 is almost

perfectly aligned with a rate of 5.25 to

5.5 divide those two in half add them

together divided by two and what do you

get

5.375 so if this level matches

5.375 it means one more rate hike if it

goes above 5.375 it means potentially

two more rate hikes and under means

potentially less than one more rate hike

and so as you can see we're basically

right there uh and and we've really

scored it up in the past few weeks here

to to basically fully price in that next

25 BP so I think these fears about

another 25 BP it's like oh my gosh we're

gonna get another 25. nobody cares it's

already priced it it's priced in bro

camera's right there so then we've got

our five year break even right here as

you can see it's massively volatile

but what I really like to do is just

zoom in over here on the right and this

is this uptrend I really want to get rid

of I'm tired of seeing this uptrend

right here this uptrend's gotta go and

as you can see what we have here is

still an uptrend yeah the uptrend is not

going away but uh it is uh it is finally

starting to uh at least reject a little

bit which is good because for a moment

there it just felt like we were just

gonna go straight up uh so we're on this

channel it's clearly an upward Trend

channel the FED needs to pressure this

down the more this continues to rise the

more in my opinion we're going to start

seeing a second rate hike uh potentially

signaled by the fed I'm convinced

although they don't Clearly say it I'm

convinced that this is pretty much all

the FED needs to look at but that's too

boring but I mean think about it if

there were one chart the FED could look

at guide a monetary policy I think it's

this particular chart if you want if you

want to see Cuts get that number to 1.6

kind of where we were the last time uh

we we started seeing pauses and cuts

from the FED in 2018 ignoring the the

craziness of the pandemic here for a

moment then uh

the more we see this trend down the more

we could see a pause and so as you can

see look at where the pause was I wanted

to write that here the pause was almost

at the bottom of of this trend right if

I place it right here this is where we

got pause in the middle of June and and

so you can see if we had our pause here

and clearly this actually doesn't even

align with pause this is sort of the

hiking territory you could almost make

the argument

that if we're in these boxes over here

you're in hike territory and down here

you're in Paws territory and then if you

get lower you're in the cut territory so

again it's it's I like to call it the

one chart that tells you exactly what

the Federal Reserve is up to I think

this confuses folks though because it's

like it's almost overly simplifying it I

mean look I was a big fan of saying I

don't think the fed's going to hike

again in June because it would make the

same mistakes of well basically what

they did uh back in the 70s where they

you know uh hike and they stop and then

they hike again and they stop I think

all of that is nonsense you know I think

it's a bad idea but looking at this

chart I look and I go okay well crap

they're probably going to hike again

because of the way the five-year break

even has moved uh and that's okay you

know things change the data comes in

strong and then the fed's got to keep

doing their work to some extent though

it's not necessarily a terrible thing

when we get strong data this is where I

still think it's kind of remarkable that

people cheer this idea of yeah let's get

really bad data because that'll make the

FED stop no give me strong data and then

lay another hike on me who cares just

give me good earnings at the companies

that I invest in that's what we're

looking for obviously we've got the

earnings Catalyst coming up now that's

gonna be fun uh but here another way to

look at this this favorite fed chart

which I think is so useful is look at

the five year for a moment and what

we'll do is we'll look at the uh and I

know it sounds a little confusing it's

the five-year chart like a view of the

chart

of the five-year break-even inflation

rate okay good now that we have that

here's the what that actual chart looks

like so let me put this into context

look at where the pause is and here

let's make this a little smaller

together so we could see this

functionally and uh see where where's

that that cut element again anyway so

you get pause the pause levels right

there hiking level is right here and

then where's cut and anything above that

obviously and then where's cutting level

well cutting level is your your fed

pivot level I like to call it uh which

would be right about here pivot and then

we'll draw our little line over we've

done this many times before but it's

always worth reiterating just to compare

where we need to be

there you go that is roughly straight

there you go so uh that shows you about

that one six one seven five ish range

somewhere right around here probably

that's probably better right there uh

this this is where we're trying to get

to with the pivot level so when you zoom

in it's obviously easier to view this

but again I think this right here is a

sign of success for The Fad whereas over

here you add a sign of panic this was q1

of 2022 and this was starting to feel

like Paul volcker and people are like

Kevin why did the stock market Fall so

terribly in 2022 well it's because of

this single chart one chart can tell you

and I know look I'm not a big fan of

saying oh one data point is all you need

but that's literally what I'm saying in

this is like if if somebody was blindly

dropped into uh you know somebody was an

alien and they were allowed to have one

piece of data about what the Federal

Reserve was doing it could be literally

this chart because that alien would who

would understand monetary policy let's

say yeah Fiat and fake printed money

anyway let's let's assume they knew

about that they would argue the FED

would probably be pooping their pants in

this range right here which they did

who remembers that December 2021 fed

meeting where we went through the

minutes

in January and we're like oh my gosh

this is the worst report we've ever read

from the FED it was all over here in

panic time this was panic mode and

that's why we had the stock market

Lowe's over here in mid 2022 and towards

the end of 2022 it really wasn't until

we had this confirmation of a downtrend

uh over here-ish uh I would probably say

that last that last quarter to the

beginning quarter over here where uh in

hindsight we start looking and saying

okay maybe maybe this fed policy is

actually working maybe we can actually

anchor and keep inflation expectations

anchored and not get Paul volckerd and

then of course we get uh after our tax

loss harvesting sales of 2022 in the

stock market you get your Recoveries

over here

uh now it's just a matter of finishing

the job all right finish the job get

this to continue to Trend down and it's

somewhat flattened here and so either

waiting for those rates to bite or

continuing to hike a bit more is what's

going to drive that down into cut realm

my expectation at least so we'll see but

again if I if I were looking at one

thing it'd be that uh and uh it gives us

a little bit of an insight into the

latest from the FED uh now that also

reiterates some of what uh the Federal

Reserve is suggesting and some of the

speakers we've had a lot of speakers

this week from the Federal Reserve I

personally don't really care about all

of the various different speakers a lot

of people they send me messages they're

like oh my gosh they're going to be so

many speakers from the FED uh that's

going to take the market I'm like no you

can almost expect what the FED is going

to say and these are all various

individual members just offering their

opinion

ultimately the only opinion that really

matters and I know this sounds crazy to

say but it's j-pal when you get all of

these other speakers

unfortunately

their opinions don't matter as much what

matters is the consensus of the fed and

that's driven by j-pal so uh look I mean

just to catch you up this is some of the

stuff we're hearing fed officials say

higher interest rates are needed to

reach two percent inflation goal and

when you consider this

stacked up against this chart yes higher

rates are needed to get that line down

of course what do we have here three fed

officials on Monday said policy makers

will need to raise rates further this

year to be a bring inflation back to the

central banks Target

still have a well Michael Barr here uh

who's on the uh who's the Federal

Reserve right Vice chair for supervision

told a bipartisan policy Center meeting

on Monday quote I would say we're close

but we still have a bit of work to do a

bit sort of implying one or two hikes

you've got a similar argument over here

from Mary Daly suggesting we likely need

a couple more rate hikes to get to two

percent

and here's another one where she says in

order to ensure that inflation is on a

sustainable And Timely path back to two

percent my view is that the funds rate

will need to move up somewhat further

from the current level and hold there

for a while as we accumulate more

information on how the economy is

evolving

San Francisco's fed Chief says she will

she is starting to see signs of the

economy slowing and added that supply

and demand is coming into better balance

this is good of course obviously the

risk is again going too far

BLS jobs data of course we saw well

above the levels consistent with two

percent inflation that is the pay gains

pay gains remember came in at point four

percent which is annualized out to 4.8

percent you know what's funny is when

when I talk about annualizing I talk

about multiplying by 12 it's very simple

as soon as you start talking about

annualizing numbers for Tesla all the

Tesla bulls start freaking out and going

you know you can't multiply by 12 to

annualize you have to compound the

growth oh look up the definition of

annualizing oh my God anyway so

Rafael boste said that while the rate of

inflation is too high policy makers can

be patient for now amid evidence of an

economic slowdown a stance at odds with

many of his colleagues so here you've

got one of your doves it's kind of like

I don't know man we should oppose and

then everybody else is like bro we only

use one chart just look at the five year

Break Even man it's still gonna come

down more and then Bostick is like but

bro you know the economy is really

slowing just wait and it'll come down

look the good thing is and it's very

actually good inflation expectations are

uh either you could say very anchored or

trending down even more there was a a

New York fed inflation expectations

piece that came out and this is

different from the University of

Michigan survey it's just another

version of this and Reuters published a

piece on exactly that

take a look at it Americans said in June

okay here we go come on Reuters with the

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so here you go Reuters American said in

June they were expecting the weakest

near-term inflation gains in just over

two years while continuing to mark up

the expected path of home price

increases yes the New York fed survey of

consumer expectations for June I saw

inflation levels Rising by 3.8 percent a

year from now and that is down from the

4.1 expectation in May this is very good

you want to see anchored inflation

expectations and down trending

expectations

this was the weakest read since April of

2021. that's fantastic

three percentage Point drop from the

peak a year ago so then you've got

inflation Outlook

at a longer Horizons however was mixed

uh this would be your usually your three

to five year outlook yep three you're

holding steady at three percent But

Rising to three percent five years out

from the May 2.7 reading now these

levels tend to be relatively in flux and

this article is a little misleading in

that inflation expectations here in the

longer run are okay to technically sit

at three percent and still have a two

percent Target

usually you would expect inflation

expectations slightly higher than what

inflation is actually targeted at I know

that sounds weird but the inflation

expectation for about the 10 years prior

to covid

or 2.8 percent

so the more we float around 2A you know

you get a little bit above a little bit

below the better and we'd like to see

that steady of course if we can get them

the trend down a little bit that's where

we start building in Cuts now it

probably doesn't take or won't take much

for this to rapidly fall in the event

that something does break and the way

something could break

or the way to visualize something

breaking is just to zoom into the

banking crisis

because if you take this and you kind of

just put something right here like oops

put a little oopsy-doopsy right here you

can see this plummet in inflation

expectations Could Happen very very

quickly and this is where you got

banking failures really driving down uh

fears or or increasing fears that we're

going to have substantial economic

problems and so you get this sort of

oopsy-doopsies so anyway this gives you

a little catch up on inflation

expectations and what some of the latest

are again we have been channeling up on

these at five year Break Even inflation

rates

not to any kind of concerning level but

certainly a level at least that suggests

yeah fed's probably got a little bit

more to do you could really see that

here that uptrend's really got to settle

down and stop so it gives you some

thoughts on inflation expectations again

good news from Reuters uh reasonable

expectations here mostly already priced

in most of economic activity or Market

activity now should probably Focus on of

course I mean in-line expectations for

CPI reports but after that it's just

earnings earnings earnings earnings now

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