Fed JUST Admitted they're Clueless: REDUCING Cuts Planned

Hey, Bostic of the Federal Reserve just

argued for one interest rate cut from

the Federal Reserve. It's going to have

some pretty big implications for the

economy. A lot of folks already thinking

that the Fed needs to do more to respond

to rolling recessions or maybe a big

recession that we're already in or going

into. Who knows? Stock market had a big

rebound today. Is that why boss sticks

U-turning today? Let's listen to it and

find out. Here's the the president came

out a short time ago and said the Fed

should lower interest rates. When he

talks, do you listen? Well, we hear lots

of voices. I would say my job is really

to talk within the sixth district and

see where policy should go based on what

I'm hearing in terms of the momentum of

the economy. And today, what I would say

is there's a lot of uncertainty. uh

forecasting is maybe a bit more

challenging than it's been in the past

but uh look I stay on my job to just

talk to the business folks that we that

we see uh and and hear from them to

understand sort of what's happening on

the ground and that really is the thing

that informs me uh very much well this

is the part where I'm normally going to

try to pry out of you some sort of

guidance on future interest rate moves

but when you look at the summary of

economic projections the dot plot from

last week one gets the impression that

you don't really have a clue at this

point. Yeah. Well, you know what we've

heard and what I've heard is that we

don't really know where the economy is

going to go. Business leaders don't.

Okay. This, I think, is so crazy that,

you know, the Fed has

2,000 economists researching this stuff.

And the answer is, yeah, we don't really

know. Good luck, bro. Dude, the Fed has

given us guidance since like 2008. We're

good. We're good. We're good. we're

good. We project things are going to be

good. It's only been recently that

they're like, "Yeah, we have no clue.

Don't know. Families don't know. And

local policy makers don't know either."

So, one of the things that really has

has impressed upon me is the idea that

people are taking on board information

as it occurs. What they're hearing are

things that are leading to expectations

that there'll be upward pressure on

prices so that inflation will happen

longer. And I've taken that on board. So

my projection of where inflation is

going to go this year is pretty much

sideways. Uh and we won't get back to a

more neutral level of inflation or 2%

target. I don't project until sometime

early in 2027. But wow,

2027 right now PCE is uh

2.5% at least per you know Powell's uh

comments last week. We do have another

PCE release coming this week. I think

it's the 28th that we have the other PC

release coming out uh Friday. But but

the point here is that Bostic's like,

"Oh yeah, man. It's going to be another

two years before we get inflation down."

Now, that's remarkable because that's

going to weigh on a lot of interest rate

sensitives. You know, the solar

industry, the auto industry, to some

extent, the real estate industry that

has been overbuilt in many markets.

These markets could continue to suffer.

Now they could continue to create buying

opportunities for people who have cash.

Uh but otherwise, you know, higher rates

for

longer, they could also set

up for a Fed that isn't responding to

real underlying weaknesses that are

happening in quits or jobs or frankly

with corporate earnings. Uh if we start

seeing a rollover in corporate earnings,

now all of a sudden the hard data is

coming in as a miss and that's when

businesses really start cutting back. We

we do not have a lot of room right now

for layoffs and the Fed's going to have

to move really really fast if there are

layoffs so far. No major layoffs yet.

Knock on wood because that causes a lot

of human suffering. But it is very much

hearing people taking the latest news,

figure out what that means for them and

then I will respond to that in terms of

how I think about the economy's

trajectory and policy. Last month you

said you thought, you know, this is

ordinarily where you would hear them say

we have 2,000 economists that helps out.

Apparently not. that we would have two

rate cuts this year. Uh the dot plot

didn't change, still calling for two

rate cuts, but a number of people moved

their dots up to say maybe we get fewer

than that. Were you one of those? I was

one of those. So I was a two, I moved to

one mainly because I think we're going

to see inflation be very bumpy and not

move dramatically and in a clear way to

the 2% target because that's being

pushed back. You know, I think the

appropriate path for policy is also

going to have to be pushed back in

getting us to that neutral level. Well,

some of your colleagues also moved their

dots down suggesting that we might see

more rate cuts probably because they

think the economy will weaken. What do

you think the odds of a economy

weakening because of uh fiscal policies

are? Well, what I would say is I am

hearing more concerns about the

trajectory of the economy. That's

undoubted. But what I also will say is

the data that's come in to date has not

actually shown that and we've still seen

a resilient economy. I mean this is

interesting because what you're really

doing is you're saying look the the data

last month was really really bad. The

data this morning was okay. I mean the

services still contracted uh to the

extent that they're not growing at the

levels that they used to. They're still

positive though on the service side.

Manufacturing fell into actual

contraction again. But you're ignoring

now the bad data that we've gotten and

you're saying, "Well, today's was good.

Everything's fine." Not even mentioning

the bad data. Interesting. I I do know

that consumer sentiment has started to

take a dip. Uh and the question that we

face right now is is consumer sentiment

going to be a leading indicator like

like it was pre- pandemic or is it going

to be something that doesn't really

translate into actual observed behavior

in the economy that as how it played out

for most of the pandemic? Right now it's

an open question and it's one of the

things I'm going to be watching very

closely in the months to come. Well, I

mean that is fair. Historically,

consumer sentiment is a leading

indicator, but like Powell, he wants to

say, "Let's wait and see." Hard to know

for sure what consumers are going to do,

but you talk to business leaders all the

time. What's the general attitude of

CEOs right now about uh business outlook

and about their plans for say hiring or

uh even raising prices? So, you know, we

actually have started to ask our

business leaders exactly this question.

Where do you think pricing pressures are

going to go? Higher or lower? What we've

heard consistently is they think they're

going to go higher. Then we ask what do

they think is going to happen in terms

of their sales? And they're also quite

bullish on the sales rising as well,

which says to me they think that

consumers are going to be able to manage

these higher levels of prices and

whatever changes in prices that happen

moving forward. We'll have to see if

that actually plays out. I think that'll

be one of the big questions and stories

that emerges through the course of 2025.

Namely, how the consumer manages in the

face of these elevated price levels.

Well, it is true. Business sentiment

while it has weakened overall is still

very optimistic. And I think this is why

and we've talked about this in other

videos. You have a lot of companies that

are saying, "Hey, we're going to invest

bigly in the United States. Hey, please

don't tariff us, bro." like Hyundai

announced, you know, hey, we're going to

build a steel factory in Louisiana. And

then Trump is like, good son, we won't

tariff you. Okay, he didn't say the good

son part, but basically, we won't tariff

you. This is, you know, what Trump is

trying to get because Trump gets credit

for these new investments. Businesses

don't get tariffs. So, it's sort of a

win-win. But the question is, when are

you actually going to deploy that

capital? Are you just saying it while

you wait for the uncertainties to go by?

Well, yeah, we're optimistic. We're

going to build and then what if you

don't? This has happened before in the

past. During the 2018 trade war,

companies have done this. Like Foxcon,

oh, we're going to do10 billion dollars

of investing. They only ended up doing

700

million. So, TBD, if companies are

saying prices are going to go up, are

they going to pass that along if tariffs

come on? And uh what to uh the cost of

their materials? Well, we've done

surveys to ask this question as well.

And what we've gotten in survey

responses is yes, they're expecting to

try to pass these through. The

expectations about uh unit price costs

going up is clear, but if you look at in

our surveys about what they're expecting

for price changes, the amount of price

change they're expecting almost matches

the cost change one for one, which says

a complete pass through is the

expectation. And then again, we'll have

to see what happens in terms of whether

consumers take that on board. What are

they telling you about the labor market

and their plans for employment going

forward? Well, labor markets, they're

still tight. Uh not as tight as they

were 2 years ago. Uh but you what we

hear from most businesses is that's not

a source of worry for them. They feel

like if they can get if they need

workers, they'll be able to get them.

And that wage pressures are not really

outsized relative to where they were

pre- pandemic. So folks are pre feeling

pretty good about uh the prospects in

terms of workers. Businesses are feeling

good. Workers themselves less. So you're

kind of you you're I I mean if you could

freeze unemployment and the job openings

level where it is now, yeah, you could

actually probably be okay. You're most

concerned about a further deterioration

here. Really? Border crossings are way

down and deportations are supposedly

ramping up. Uh what do you hear from the

service industries about their abilities

or even construction to find workers?

Well, we haven't been hearing this as a

an across the board thing, but we are

hearing from particular sectors that

there is a shortage that's starting to

emerge in terms of work crews on housing

construction sites and the like. We're

just have to watch to see if that that

remains isolated or whether it becomes

something that is more widespread which

then will have implications for the

ability of the economy to meet the

demand that that's out there. You were

talking about consumer sentiment. Uh

what do you make of the rise in

inflation expectations which at least in

the Michigan survey has been fairly

dramatic? Well, as you know for many

many years uh shortrun inflation

expectations have really matched where

people are and I think seeing the

elevated prices hearing the the talk

about the tariffs and hearing hear the

idea that tariffs push up prices I think

has shaped people's expectations in the

short run. It's the medium and the

longer term that I'm trying to focus on

much more. there the the uh reaction has

been far less dramatic, but to the

extent that that starts creeping up,

that'll be something that I'll have to

worry about. Well, there was a lot of

pearl clutching on Wall Street when

Chairman Powell suggested that the

impact of tariffs on inflation would be

transitory. Uh would you use that

characterization? Well, I try not to use

that word anymore. I will just say that.

But I do think, look, we have to

acknowledge that historically when

tariffs have played out, there's been a

one-time jump in prices and then the

economy's returned to its usual

trajectory such that policy doesn't have

to respond to it. For me, I think there

is a question about whether that's going

to happen this time. We just we've just

gone through a period of elevated

inflation. So, it is very much on the

consumer's mind. And I fear that they

might be more sensitive to higher prices

today than they have been in the past,

but they might not. And we'll just have

to see how that plays out. Well, this

whole question of seeing how it plays

out given how we're getting government

by tweet and things change all the time.

Are you sort of foreclosed from acting

preemptively? Are you going to be

necessarily behind the curve? That's a

big one. And I want to hear this, but

first I want to show you this chart. No,

it's not an ad. I want to show you this

chart right here. It's the 5-year break

even. And I think it's important to pay

attention to because you just heard

Bostic talk about longerterm inflation

expectations. And I I drew this all the

way back to 2020. So you got the

pandemic over here. We're obviously, you

know, initially when we're in recession,

inflation expectations are very very

low. Uh so you can see this, we have

seen an uptick in inflation expectations

under uh Trump. We've uh we shot up

quite a bit from a low of our

unemployment crisis in September and

October getting a 50 basis point rate

cut. Uh during that time we were sitting

around 18 on inflation expectations 5

years you know out. Uh right now that's

risen to about 2.6. Now that is in

alignment with roughly where inflation

sits right now. So yeah, in fairness,

long-term inflation expectations haven't

moved up from its sort of alignment with

where inflation is, but they've

certainly gone up quite a bit uh from,

you know, when we got a 50 basis point

cut from the Fed. So this idea that oh

the long term hasn't moved much, uh it

kind of has. So it is something to pay

attention to and hence why I think this

preemptive question is also important.

So back to

Mac. Okay.

I don't think we're going to be behind

the curve mainly because we know we're

waiting. And so from my perspective, the

longer you have to wait, that means your

your actions when you decide that it's

clear where the economy is going are

going to have to be larger than they

would be otherwise. Okay. Interesting.

This is the second person we've heard

say this now. Last week, Goulsby told

us, you know, when we act, we're going

to act bigger. This is really

interesting because the Fed's basically

telling you, hey, um, yeah, we don't

know what's going to happen, but when it

happens, we're going to have to move a

lot bigger and faster. Very interesting

because it stands in such contrast to

obviously, you know, the buy the dip

momentum that we've seen and and uh, you

know, markets skyrocketing today on this

idea that tariffs might be slightly less

bad than expected. And the Fed's sort of

like, that's great. If there's a shock,

we will come in hard and fast. I guess

it's good. It's some form of a Fed put

actually if you think about it. So, I

would say we don't want to make it's not

in our interest to move in one

direction, find out that the in that the

economy is going a different way and

then have to undo that. Right. I'd much

rather take the time, make sure that

when we act, it's it's acting

appropriately to where the economy is

and we can make sure that that we stay

close to our dual mandate objectives.

Now, you produce the GDP now number from

the Atlanta Fed. It's gotten a lot of

publicity lately. Not not talk about

gold, baby. It's cheery news because the

numbers gold adjusted, Atlanta Fed GDP

wouldn't be negative. It would be like

positive point4%. Which is still pretty

bad. Still pretty low. But even adjusted

for gold, it's sort of unchanged, which

is a big drop from the growth rates

we've seen. Uh do you think we're in the

midst of a real slowdown or was this

just sort of a temporary dip at the

beginning of the first quarter? Well, we

we'll have to see. You know, GDP now is

a now cast. So, it takes data as it

comes in through the course of the the

quarter. What I would say is the drop

from the 2.2% 2% down to anywhere from

zero to a half a percent. Is a sign that

that that that suite of data, that set

of data that came in is suggesting

slowdown. We'll have to see what that

looks like for the end of the quarter. I

will say most businesses I'm talking to

aren't reporting to me that they're

seeing that kind of a slowdown. So,

we'll just have to wait and see what

happens. Well, if the economy slows a

lot, which would suggest maybe that

lower rates are needed, but inflation

hasn't come down to 2% and you want to

have higher rates to quell inflation.

Uh, if you have that uh sort of

stagflation, which do you choose to uh

act on? Well, I'm not jumping to

stagflation yet, so I'm just going to

say that. But I've been saying for a

long time, it is paramount that we get

inflation back to our 2% target. That's

the thing that I'm laser focused on. to

the extent that the labor market this a

little bit is like this is when they get

into sort of these stagflation arguments

the conversation gets a little older now

we'll keep going with this in just a

moment but it's worth remembering that

when they get asked about stagflation

you're almost better off just fast

forwarding a little bit because here's

the thing that is the worst case

scenario for the Fed where they can't

cut because you have inflation so

they're always going to punt this

always. Okay, at this point they just

talk about a whole lot of nothing. You

don't really get anything useful out of

this. Punting questions about Donald

Trump and all this other nons. There's

really nothing else useful in this.

Bottom line out of this. You have people

at the Fed who are like,

"Yeah, you know, confidence is down, but

um you know, from what I'm seeing,

everything's fine, so we're going to do

nothing, bro." And it's like, all right,

that does mean the Fed could potentially

be late. But it does mean, and this is

now the second Fed person to say, "Hey,

you know, if crap hits the fan, we're

going to have to move faster." Kind of

interesting. So then the question is,

how do you play that? Well, in my

opinion, you want to be prepared for

when the Fed goes U-turn, you want to be

ready to bye-bye bye because usually

when the Fed goes U-turn, it's moon time

for real. But that's often at the point

of panic when people have lost their

jobs and they don't have cash available

because they spent all the money that

they had buying the dip too early. Why

not advertise these things that you told

us here? I feel like nobody else knows

about this. We'll we'll try a little

advertising and see how it goes.

Congratulations, man. You have done so

much. People love you. People look up to

you. Kevin Pra there, financial analyst

and YouTuber. Meet Kevin. Always great

to get your take.