YIKES! Fed sees things "Going South Quickly"!

hey everyone me Kevin here oh boy the

Federal Reserve is now talking about the

potential for there to be a lot of room

to cut rates because things could go

south very quickly this in a piece out

from Nick t on my birthday yesterday by

the way if you haven't seen it yet I did

have the fortune of spending my birthday

lunch with Kathy Wood in Florida which

is really wild because then I had birth

a dinner with Lauren my wife in

California so it was a little bit of a

long day but technically that means I

had a 27-hour birthday H let that one

sink in anyway so plummeting inflation

that is Nick T's headline but what's

buried beneath the headline what's

buried beneath the headline is very

interesting we're going to start here

let's keep this simple let's say that

core inflation is is 4% and these

numbers aren't supposed to be exact this

is just to give you an example here okay

let's say core inflation is 4% let's say

the FED wants our star or are not no not

like Co days it's the level of

restriction that the FED has let's say

they want that level restriction to be

1.5% well then your total interest rate

at the FED would be 5 1.2% okay great

that's understandable but core PC isn't

4% it's lower than that it's probably

closer to 3% okay so let's throw on 3%

here and they want us to be at

5.5% okay fine so then we say this is

25% this is another way you could

achieve this but what happens when core

pce goes down and you don't change the

headline rate so in other words what

happens if we take this uh delicious

line line right here for core PC we drop

it all the way down over here so we

don't actually have 3% core PC we have

let's say

2% core pce well then to have the same

level of

restrictiveness we should actually be

cutting rates a full 1% to about

42% and the reason we would do that is

because if you don't cut rates while

inflation is falling you actually start

adding more tightness to the economy and

when you say you want to keep rates

higher for longer you're not trying to

keep things getting more restrictive for

longer or increasingly restrictive every

single month for longer because you're

adding more pressure to the economy and

you're likely to break something you're

likely to cause an unemployment style

recession large joblessness okay now we

understand this at least to some extent

the big thing to remember here the big

takeaway is if you don't cut as

inflation is falling you add more pain

okay fine well maybe more pain needs to

be added right I mean the inflation

figures are all rigged anyway they're

all fugazi fugazi and yeah to some

extent many of them are fugazi fugazi

but the FED bases their rates on that

Fugazi gazy okay so what did the Federal

Reserve think that inflation was going

to be at the end of

2023 all right so we look here end of

2023 projection and we could see this

projection was made September 20th all

right so what do we have September 20th

well September 20th we had projections

that pce inflation would be 3.3% and

that core PC would sit at

3.7% and in June the projection before

that we were at 32 to 37 or uh

3.9 so let's just take a midpoint here

for a moment so take a midpoint of these

projections let's say basically at the

end of the year the Federal Reserve

thought that inflation would be

3.25% on the headline and 3.8% on core

all we did here was take the difference

between the fed's Jun opinion and their

September opinion keeping in mind that

their last rate hike was in July in that

midpoint see that what was their

estimate of inflation here what was

their inflation estimate here for the

end of the year well that was between

3.25 and 2.8% what did we actually get

with the Rigg numbers well core pce

instead of being 3.8% for core PC we

actually got 2

.9%

2.9 and the annualized rate for the

year

2.4% well okay but what about headline

headline which was expected to be

3.25 well for headline we got

2.6 so in other words

substantially lower now that's very

interesting so

2.6 for non-core is about

625 per lower that's like 2 and a half

rate cuts of 25 BPS lower than what the

FED thought it was going to be and the

core figure was about 30 basis points

lower than what the FED thought it was

going to be but not only that this is

where it gets a little ridiculous Nick T

makes this really interesting analogy

well I guess I shouldn't say it's really

an analogy it's kind of just pointing

out by Logic here that it might actually

be even worse than what I've just

described the reason is he says in the

last 6 months if you annualize what PC

inflation has been over the last 6

months you actually end up finding that

inflation has

been

1.9% okay so that's interesting so the

Federal Reserve is

potentially way behind in other words

they've already gotten inflation

substantially down at least via

pce and the fugazi numbers this doesn't

mean prices are lower remember the

Federal Reserve isn't actually trying to

get inflation lower they're not actually

trying to get prices lower like the

inflation all the crap we felt from

2019 they don't really care about you

they don't really care about you having

normalized prices again and going back

to 2019 prices they don't care how do

you know that because they bluntly told

us that in the December fomc meeting

Dron pal bluntly responded to a reporter

who asked hey what do you say to the

people who are upset everything is so

much more expensive and his response was

well we hope they can make more

money in other words good luck prices

ain't coming down anytime soon mhm so

where does this idea of a lot of room to

cut come from and where does this idea

come from about potentially a very rapid

decline things going south very rapidly

well actually comes right from the FED

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take a look at this first of all there's

the evidence of the 1.9% that I talked

about about the annualized rate of PC

inflation between July and December down

from 4% in the prior six-month period

but listen to this Esther George who

left the FED at the end of last year so

potentially could be a little bit more

transparent says we made a very

aggressive tightening not only uh look

at the supply that came back but also

the demand that came back uh uh you know

down last year but more importantly

listen to this there's potentially a lot

of room to cut rates before they are in

neutral territory again and you've still

got quantitative tightening restricting

the economy in her words on

steroids and on top of this listen to

this policy makers are right to be

worried that cutting would blemish their

credibility however in November the

hiring rate in the United States dropped

to its lowest level in 10 years a sign

that more companies might feel they are

overstaffed the labor market is a tricky

one before a downturn it always looks

like it's not too bad and then it goes

south quickly in other words the fed's

got to be very careful here if they

really start inducing an unemployment

recession we're screwed now what's my

opinion out of all of this and what's

Kathy Wood's opinion because we talked

about this at lunch yesterday well her

opinion is the Fed has already gone way

too far and they're not going to be able

to prevent deflation by cutting rates I

also believe the FED has gone too far

but I re I believe the FED at least

maybe I'm hopeful will realize that will

cut rates and while there will be a

surge in

unemployment I hopeful that they're able

to minimize the real damage of

increasing layoffs which have already

begun so in other words I have slightly

more hope than Kathy uh in other words

she believes we are almost certainly

heading into deflation I think they'll

be able to print their way out of

deflation and kind of keep the Ponzi

going a little

longer we'll see nobody knows but the

point is Federal Reserve through their

Nicki leaks Wall Street Journal buddy is

starting to signal

that we may need to come down frankly

just because inflation is coming in way

lower than expected maybe it'll heat up

again but the data doesn't seem like

it's indicating that it is and if we

look at the earnings calls we do every

day in the course member live streams

what do we find lack of companies

indicating they are remotely willing to

raise prices or even if they're willing

or unable to talked to Kathy about that

yesterday as well and she was shocked at

what Texas Instruments and 3M told us

about the lack of growth the negative

growth the frankly negative growth they

are forecasting so with all that said

and those manufacturing indicators

economic indicators causing potentially

more cause for concern what's dra Powell

going to tell us this week when the fomc

meeting takes place which of course I'll

be streaming in a couple days on

Wednesday well probably exactly what we

just talked about now we won't get a

rate cut this Wednesday but we are

expecting to see the balance of the FED

saying we might have to cut just to stay

at the same level of restrictiveness we

might see them try to explain that to

markets which potentially to stocks

could be bullish if they don't the lack

of them suggesting this could be bearish

we'll see what happens thanks for

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congratulations man you have done so

much people love you people look up to

you Kevin PA there financial analyst and

YouTuber meet Kevin always great to get

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