Shocked: What the Fed JUST Said (Jerome Powell).

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link down below folks if you're curious

about what the heck jerome powell just

said

and what this might mean for the month

coming ahead

you'll want to tune in to this video hey

everyone meet kevin here today

we heard jerome powell present not only

the fomc statement

but projections about our economy going

forward we learned a lot about

his thoughts on inflation what we expect

the fed to do with interest rates

and tapering are we expecting a taper

and when are we expecting

it we have a lot of insights in this to

begin though

jerome powell came off a lot more

aggressively than he usually does

today we had hawkish jerome rather than

dovish jerome which is

just a reference to somebody believing

the economy is doing well

and performing strongly compared to when

someone is dovish when we believe that

the market is

not doing well to me this really felt

like

real talk it felt upbeat but it also

felt very real

about what the actual data is showing

regarding

inflation and how this actually plays

into or maybe modifies

what the federal reserve believes

regarding action

the federal reserve decided to keep

rates at zero we expected this the fedex

stated that they are maintaining their

asset purchases at 120 billion

per month we expected this however

we got signals in today's meeting that

suggested the potential for

two interest rate hikes in 2023

along with some economic projections

that suggest those rates could come as

soon as the n

or rate hikes could come as soon as the

end of 2022

which is a faster rate than expected

likely to somewhere between half

to one percent now we also have

mentioned that the taper could be coming

sooner than expected and because of this

sort of hawkish tone

we did see treasury yields rise

substantially

and the market didn't do substantially

well

during the course of jerome paul's

talking though it did end

stronger than how it started if you take

a peek at a 10-year treasury for example

we see a substantial move from about 1.5

up to about 1.57

in the 10-year treasury which seems like

it's a really big move to the upside

but if we do zoom out a little bit to

the year to date we can see that this

move up here recently is

is really a drop in the bucket and there

it is it's fully expanded

this move here is really a drop in the

bucket relative to this trend

this is the trend we want to avoid we

want to avoid seeing inflation or sort

of inflation expectations

as measured potentially by 10-year

treasury rates by seeing yields on 10

years

skyrocket we don't want to see this

skyrocketing anymore

and we've gone away from this to where

we are in this pattern of sort of a

descending yield on the 10-year

but we have recently seen a spike after

jerome powell's talk now

again zooming out it's not substantial

but the market is reacting to what was

said so

what exactly was said and do we need to

be worried about what was said

so first let's talk about inflation

exactly

everything that was said about inflation

so jerome powell told us

that we should expect to see elevated

inflation measured in their

minds by pce over the next few months

that's the personal consumption

expenditures measure which is kind of

like the cpi

but anyway that's the one they use now

they believe this is because of a

rebound in spending and base effects

which means we're comparing to last year

along with supply bottlenecks now we've

heard that before

but what's different what's different is

jerome powell today for the first time

acknowledged

that the supply bottlenecks are proving

to be larger than

expected that is a quote from jerome

powell that the supply chain

issues are expected to last longer

and be larger than expected and those

are things that signal

more inflation not less at least more

inflation for the short term

and this is really why i call this sort

of real talk is it's finally the fed

acknowledging that

well yeah we've definitely had higher

inflation in the short term than we

expected

now right now he mentions that it's

possible

that inflation could continue to be

higher than expected

but we need to be patient to see exactly

what happens these are some things that

started to get the market pretty nervous

as i watched this live now when he was

asked how much longer

we can sustain our interest rates

essentially at a zero

before he would start getting nervous

jerome powell went into some more detail

he mentioned look we've got to consider

lumber prices as a really good example

for

what might happen with inflation when we

consider lumber prices

lumber prices in fact we can even pull

them up lumber prices

we'll see that lumber prices have

dramatically

shot up over the last year i mean to

some cases

we've essentially tripled our value in

lumber

we could have made more money in lumber

than we could have in tesla stock

if we had invested in lumber this year

but anyway take a look at lumber here

a massive explosion in prices through

this year from essentially a base here

around

the beginning of november of around 500

to as high as 1607

more than a triple but what we've

noticed is this very substantial sort of

decline

in lumber price uh prices across the

board as people who were hoarding lumber

start

selling this lumber now what's really

incredible about this comparison is

jerome powell believes that inflation is

actually going to follow this trend

that right now we're in that level of

seeing this massive explosion in

inflation

and that it's going up and peaking

higher than we expected it would

but jerome powell believes that it's

going to come down much like lumber

prices are coming down now

and he expects the same to be true with

used car

prices which currently make up one third

of the month-over-month inflation that

we're seeing

he says that right now we're in this era

of a perfect

storm of very strong demand and limited

supply he mentions it's really easy to

turn on the valve of demand

but it's really hard to turn on the

valve of supply and that's why we have

this

uncertain timing for when supply and

demand will finally actually

match up again and he says look there's

no calendar for this

we just have to wait and focus on the

results but he does still expect

inflation to be temporary which is

obviously something we've heard him talk

about many times before

he expects it to be higher than expected

originally expected

but still to be temporary and he

believes that the labor market is

actually going to

help with inflation going down that's

because as we see

more labor be able to come into

the workforce as unemployment wears off

and schools open back

up and child care becomes more readily

available we should see inflationary

pressures

subside and one phrase that he mentioned

regularly even though he didn't want to

give us a time frame

a phrase that he regularly mentioned was

within

the next few months and that's not

really when

i believe he expects inflation to like

go way down or to two percent

it's when i think he expects to see that

big inflection point

which is kind of like lumber prices

falling

now personally i've given a time frame

of this that

i believe in september and october in

that range when we start getting q3 data

from companies in october and we start

getting

new inflationary data after schools have

been reopened and unemployment data has

been or unemployment pay has rather been

cut

and removed from the economy i would

expect to see inflation data

come in much weaker in us to start

seeing that rotation to the downside

however uh well actually to to reiterate

this

jerome powell even goes into the level

of saying that it's possible

this was a quote from him it's possible

that inflation could actually end up

being

quite low we expect these high readings

will abate like

lumber and the we expect the same to be

true for airplane tickets and cars

we think that'll happen and the incoming

data supports that now in this next

segment jerome powell tells us what he

believes would be deeply concerning for

the market

but he also tells us that he believes

the unemployment rate will go down to

four and a half percent this year and

potentially as low as three and a half

percent

thereafter he does acknowledge that gdp

is growing very rapidly revised upwards

to seven percent

that the market or the economy is doing

very well in that sense

but that the recovery is very uneven and

the biggest concern he has right now is

not exactly trying to measure labor

force participation because

that is hard to measure instead he says

what would be troubling would be

wide pressures on wages by a meaningful

amount

broadly now we really have to break this

apart to understand this

while in some segments we're seeing

wages go up for example some

entry-level service jobs are offering

much more money

just to get people hired because there

is a worker shortage right now

jerome powell says that this kind of

wage pressure is not happening

throughout the entire economy

that really in certain spots we're

starting to see people get paid more

but this is not broad and consistent

across the entire economy

and if we did see wage increases

throughout the entire economy

that would potentially be more of an

old-school formula for traditional

inflation

where when wages go up prices of inputs

go up and therefore prices have to go up

and as a result

inflation measures go up now jerome

powell believes in the coming months

we will be matched with a very strong

labor market and it will come very

quickly so much like his inflation

expectations where he thinks things are

going to be worse in the short term

in the longer term he expects things to

settle back down pretty

rapidly and strongly and so and twice in

his presentation he even hinted at the

possibility of

deflation and maybe even needing to

stimulate the economy with

more quantitative easing which is

absolutely mind-blowing but

most of his entire conversation was

focused on uh being hawkish on being hey

you know things things are a little

hotter than we expected this is still in

line with our expectations but we've got

to adjust a little bit here

so you kind of get a little bit of that

mixed messaging

but we'll come to some conclusions in a

moment so john powell was asked about

the risks

for stagflation and he mentioned that he

believes it's unlikely the fact that

we're growing at a three percent clip

per year in gdp

is something that we haven't seen in the

recovery from 2008 to 2020

especially after a seven percent growth

year

so he believes it's highly unlikely that

the economy is not going to grow very

well to where we would see increasing

prices without economic growth

he thinks we're definitely going to see

a very very strong economy

and strong growth which is actually

going to help us achieve

their two to two and a half percent

inflation target in fact

and jerome powell mentioned that

previously they were concerned that they

wouldn't be able to hit their two and a

half percent inflation target

now jerome powell said it's looking much

more likely that we're going to be able

to hit our two and

two to two and a half percent inflation

target remember they're using fate or

flexible average inflation targeting

now jerome powell did briefly mention

that we are clearly seeing an unequal

recovery that is disproportionately

affecting hispanics and african

americans and women

who are disproportionately again

represented in service or lower end

type jobs this supports the belief of

really the k-shaped recovery that we're

seeing we're wealthier getting wealthier

and poorer or getting poorer

some of the reasons i wrote down here

are look if you're lower income

child care much more of an issue who's

going to take care of the children

schooling

it might not be available so again who's

going to take care of your children

unemployment pay

is potentially disincentivizing going

back to work i mean quite frankly if you

accept just 300

a week in unemployment that's the

equivalent of making about seven dollars

and fifty cents

doing nothing uh and so that has a

potential impact

though in many cases there are

substantial amounts of families who

absolutely need the unemployment pay

because of

various different reasons being unable

to find work or their skill sets getting

totally shifted around

the way i kind of see this is imagine

you have like a really organized set of

marbles and and the table the marble

table is sort of the economy the marbles

are the people and their jobs

and it's kind of like somebody came in

and grabbed all the marbles that were

sorted into jobs on the table

threw them up into the air and they all

landed scattered on the table

like you're gonna get some marbles that

roll to the edge of the table

and need help getting placed and so i

personally think there's a benefit and a

reason for unemployment but i can also

see

the the countering arguments here now

there's also a coveted risk right

there's the fact that

blacks and hispanics are much less

likely than whites

to get the covet vaccine which this is

not to say that

they are they should or should be

required to get a covered vaccine i

personally believe that vaccines are a

personal choice

but these are things that jerome powell

is observing as well

showing that look we want to make sure

that everyone is able to recover

and that doesn't mean okay whites are

doing good let's go let's raise rates

that means no no no we need whites women

hispanics

black everyone on board the train before

we take off

and that kind of sends a little bit of a

signal of really having more patience

this by the way quick note quick side

note here is exactly why i'm running for

governor in california

to institute programs like future

schools so that all people

can graduate with a skill a career and

debt-free at 18.

maybe the united states could take

inspiration from that you can learn more

about my plan at meetkevin.com but let's

talk about

longer-term expectations with the

federal reserve so

long-term jerome powell believes that

the numbers that we're

seeing now are consistent with the drone

powell's goals of getting to

two percent inflation and this is

actually where we can kind of look at

some of their their summary statistics

here

so let's go ahead and pull some of these

charts up so first uh this is what the

10-year treasury

looks like this is kind of a reaction to

when we have higher inflation

expectations

this right here there's a lot of fear

about inflation coming

and right now we're seeing that

inflation fear kind of cool

and even with today's spike we're really

range bound

within this sort of declining trend of

fear of inflation

but we're also seeing and this was a

little bit of a shocker we're seeing

this right here

again this change in gdp estimate which

is very good to seven percent from six

and a half percent which was the

uh prior projection uh in march but take

a look at this

we are seeing an inflation projection by

the end of the year of 3.4

which is substantially higher than the

2.4 percent that was previously

projected

additionally we're seeing that sort of

increase here for core inflation as well

we've also seen rate increases being

built

into 2023 in

the overall projections of the fomc

projecting members here

so these are important things to

consider yes they're acknowledging

higher inflation right now

they still believe in the long-term

inflation will rotate down

but we've got a lot more folks

acknowledging

this higher current inflation and you

could see that here in the dot plot take

a peek at this

in march we had four people believe that

interest rates would go up

in 2022 now we have seven

in 2023 in march rather for 2023

we had seven people who believed that

interest rates would go up in 2022

now we're at 13 which is a lot

which is almost everyone now before i

provide more clarity on interest rates

because this is a big deal and this

affects the market and then we'll get

into kind of expectations for the market

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all right folks let's talk about

interest rates because this is a very

important

so right now jerome powell believes that

we're going to keep

interest rates consistent until we get

to maximum employment

and inflation is on track to exceed two

percent for quote

some time now obviously with the dot

plots and the projections we do believe

that this rate increase is going to

happen

towards the end of 2022 or the beginning

of 2023

this is a shift forward by approximately

one quarter since

previously we thought it's going to be

at least 2023

before we saw a rate increase so even

though jerome is saying it's going to

take some time

we're still seeing and pegging this for

the end of 2022.

now john powell did say though the big

issue right now for markets isn't

exactly

rate increases it's asset purchases

that asset purchases are what everyone

should be very very focused on right now

and he was very blunt about this he

mentioned not only did

the fed have a discussion about tapering

asset purchases which basically means

less quantitative easing less money

being pumped into the market

i mentioned not only did they have a

discussion about that today but he also

said

that when the time comes for tapering

we will do whatever we can to avoid a

market reaction

which implies they're going to try to

make sure the market doesn't crash

and people don't suffer this taper

tantrum but

he says when we reach our goal we will

taper so in other words

either way even if the market freaks out

we will taper

so this is really jerome powell opening

the door to

tapering is coming we've started talking

about it

prepare for it don't freak out when it

comes

now what this also means is that jerome

powell is really expecting

in the shorter term higher inflation

higher inflation than the shorter term

maybe higher and more inflation for the

long like the medium term

but in the longer term jerome powell

still believes we're going to hit two

percent

inflation and he's concerned about

deflation

in fact you can really see this in the

economic projections coming from all of

the different members

because if you look at the economic

projections you can even get a range of

what their estimates are

and so if you go here these are the

tendencies for inflation

over the next four years and you can see

that some of the members believe

inflation could run as high as 3.5

percent by the end of the year

but really nobody is estimating that

inflation is going to be in that three

percent range in 2022 or 2023

and that in the long run we'll be able

to achieve this three percent or sorry

this two percent goal here uh and so

this is really important because

you don't see even a single person at

the federal reserve

suggesting that hyperinflation is a risk

so really

this this kind of gives us some ideas in

terms of what are we to do in the market

now in a moment i'll also touch on

reverse repos and covid and slr and that

but i want to touch on the market first

so here's the thing

regarding the market what jerome powell

today said

was actually in my opinion extremely

good he finally acknowledged that

inflation is here and it's higher than

expected in the short term

but then he reiterated that if you look

under the hood which we have done on

this channel and it's why you subscribed

to this channel

if you look under the hood you actually

notice that inflation is mostly being

driven by temporary factors

used cars airline tickets other things

that are

temporary related to supply chain

disruptions which we've had

remember the quote i thought this was

very powerful it's easier to turn on

demand

then it's easier to turn on supply think

about it you can send out stimulus

checks for people to spend

but you can't send out new factories

right

that's a lot harder to do so in my

opinion my investing thesis

in in here is reiterated multiple times

jerome powell mentioned

we should expect a change in the next

few months

i personally believe that's september to

october this is why i'm staying hard on

my long positions

like tesla tech evs

energy and face consumer discretionaries

like etsy

or amazon or google i'm very bullish on

the sector

i'm not changing my position to any kind

of inflation hedging

i know that inflation is higher in the

short term we've already known this

like we've already been talking about

this all we had today is the fed

acknowledging it

the market got a little spooked that the

fed actually spoke to us clearly today

but quite frankly i appreciate it

because it again reiterates the long-run

view

and it gives us more insight into the

short term

that yeah we are going to have higher

inflation we're seeing it too

we're not blind to it you're right but

don't worry in the long run

it should still trend down now that

doesn't mean you have to believe the fed

that's just what they're saying

now uh quickly on reverse repos so

reverse repos were brought up

i did a video on this in regards to

momentum stocks and amc

there is a belief by many that reverse

repo skyrocketing which is basically

cash deposits by banks with the fed is

somehow hedge funds and institutions

depositing a ton of money

and therefore leading momentum stocks to

uh

you know to be maybe the thing where you

want to be because

this is obviously a sign of distress at

the hedge funds the problem is and we

did a 20 minute video on this so i'm

super condensing here but the problem is

we don't have any link

that that's what's happening but jerome

powell told us what he believes the

cause is

and he says it's the treasury general

account that's shrinking

which basically means the treasury is

spending money putting it out into the

economy which ends up at banks which

means banks have more cash so they put

money into reverse repos

no mention of hedges it's not ruling out

that it could be the hedges

but there's no mention of that and

jerome powell says that look we're

buying bonds

so it's putting downward pressure on

bonds making bonds less attractive

meaning banks are holding on to more

cash

which again means more money is going

into the repo market so a drone power

really

reiterated the video that we made on a

sunday explaining what's happening

with the repo market additionally jerome

powell

mentioned that look we've got to keep an

eye on kovid it's too early to declare

victory especially with the delta

variant coming

and he also mentioned that they're

looking into potential changes for the

supplemental leverage ratio

because banks are holding so much cash

right now that the slr isn't really

mattering

and that there's a risk that maybe banks

could put their cash into more risky

assets

and maybe there need to be some tweaks

here that was pretty granular

not super important for us i think

broadly but i think the big bottom line

here is that jerome powell finally

acknowledged inflation

he reiterated that it was temporary he

wouldn't give us a time frame but he

mentioned

few months many times he expects coveted

vaccination

and the ending of unemployment plus the

reopening of schools to inflect

inflation

downwards to bring inflation down though

we're having issues again more people

retiring we've got hot spots where wages

are rising

we've got a very unbalanced supply and

demand cycle right now

he makes it very clear that supply and

demand are nowhere near met right now

and that's going to take a while before

they start meeting

in some cases it could actually take

years to clean up some of the imbalances

so while we should start seeing larger

inflection points within the next few

months

it could take years to get all the

supply chain issues ironed out

now jerome powell also again

acknowledging that inflation

will still be higher by the end of the

year higher than expected but again

longer-term inflation

right in line with what the fed believes

longer-term expectations being

consistent are very important and

reiterate my investing thesis of being

very bullish on this economic engine

taking off

and doing very very well especially

after q3 earnings i think we've really

priced in a lot of the downside risk

already

of rates going up i think that's already

reflected in the pricing we see today

this is my take if you found this

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we'll see in the next video bye

you