The Fed on Coming Inflation & Interest Rates

hey everyone meet kevin here so let's

talk about the weenie babies and the fad

first things first we already know that

the weenie babies have kind of u-turned

they're not so worried about

bond yields anymore going up to the moon

they were worried about the little shark

the two

doodle and now they're over the shock to

doodle doodle of

rates or bond yields going up so now

the whole market is kind of like okay

all right cool we don't have to freak

out about bond yields anymore but

everything's kind of still in shambles

in terms of ev and

tech and even recoveries down a bit but

the indices are flat and

it is the weirdest most bizarre market

ever to be in

that's because we don't really seem to

have a clear direction but

what we do have is more insight from the

federal reserve in terms of what their

inflation expectations are

and i want to give you a chart here uh

that is a very high quality production

of exactly what's going on

so that way you can understand what's

going on and so what we're going to do

is we're going to

zoom into this chart and understand this

because this is

i think going to really help us so that

uh you know we can go with a few less

topo chicos

all right let's jump on over to it so

here's the scoop

uh first things first we have got to

understand

that in 2020 obviously the federal

reserve swooped in to bail things out

and

on a sunday dropped the federal funds

rate to

zero that was 2020. but something

interesting happened at the beginning of

2021 jerome got a little pissed off

that's because

mr jerome powell kept getting yelled at

about come on man we know inflation's

coming what's going on he's like dude

i've been telling you all at 2020 i want

inflation to come

no duh inflation is coming i've been

saying

inflation is coming we want in we want

we literally have been saying we want

there to be inflation we want inflation

to go to two percent in fact we want it

to run

hot uh and even though we want inflation

to go to two and a half percent or

potentially slightly above that for a

little bit of period of time

we're gonna just call it fate literally

that's we're gonna call it flexible

average inflation targeting fait fate

and it'll all be fine inflation will run

hot and it's cool

and so as soon as we start seeing

inflation market

freaks out throws a hissy fit we get

february 16th top of the market

to february 19th beginning of crash all

the way through

of well essentially march and now even

though lately it's kind of felt like

things have been recovering a lot of

things are still left in the doldrums

because things are a mess

and see we had pissed off jerome pissed

off the rum

is basically or was yelling back in the

market going dudes

this is what we planned for we ain't

doing anything

and the last thing the market wanted was

a jerome powell who had always been

there to just print more money to solve

problems in the market going

i ain't doing anything i see some

inflation fears i see higher bond deals

i ain't doing anything because this is

what i want

i want higher yields i'm winning yeah

well that didn't work over so well and

so pissed off jerome

lasted about two weeks and after pissed

off jerome

settled down i still remember a very

clear thursday when we live streamed him

and he was being pretty pissed and the

market was basically just tanking

while he was talking but anywho pissed

off jerome

did not work so jerome's like okay i

gotta be chill jerome

i gotta treat everybody like the true

weenie babies they are i gotta coddle

them

and be nice to them and talk smooth to

them

and reiterate to them that don't worry

i'll tell you

way in advance of any kind of changes

that we plan to make

and when we plan to make them in fact

we'll even give you

some breadcrumbs of hints in terms of

when we're going to make changes and

folks today we got a breadcrumb which

we're going to talk about in just a

moment

but this is all the beginning of 2021

here right so what are we expecting

going forward we're going forward

we're going to expect continued support

at least now from the federal reserve

120 billion dollars of monthly bond

buying 80 billion dollars of

treasury bonds 40 billion dollars of

mortgage-backed securities we're going

to continue to see the federal reserve

prioritize how important it is

to not only have stable prices but

maximum employment with emphasis on

max which would include race sex

equality considerations and we're going

to see

temporary inflation but that we don't

expect that inflation to be persistent

that the supply chain issue is causing

lumber sheet metal prices

used cars houses stocks

and pretty much everything we can think

of from going up

don't worry it's temporary nothing to

see here folks jerome powell says

it's all temporary and he'll give us

clues as to when things are going to

change

well again today we got a little bit of

a clue and so this is 2021

on the chart and the clue that we got

today is pretty unique

because it's subtle but nobody else is

really talking about it

and it is a clue as to when we actually

expect

this temporary inflation to start

subsiding when do we think temporary

inflation is going to go down

and once we see temporary inflation go

down

then we know how the fed might be able

to respond just to give you an example

let's say right now we are at 1.7

inflation uh which that's their

version of inflation okay let's go with

it for a second

let's say in their world we're at 1.7

percent inflation

let's now say in their world we go up to

2.9 percent inflation averaged over the

last next six months or whatever

at some point and we're not exactly sure

when but the fed gave us a hint today

at some point that inflation is expected

to trend back downwards maybe

or it'll just go to the moon and then

we'll have bigger issues but let's

let's go with their story let's say it

begins to trend downwards

well the theory is if we go from 1.7

inflation now to say 2.9 inflation and

the fed wants an

average of two percent inflation the

time the fed

probably expects to raise rates is

after this inflection point probably not

before the inflection point unless this

keeps going

over you know over three percent i think

then we start realizing okay maybe we

need to tighten sooner

until we get to that three percent

figure probably expecting the fed

not to do anything 2.9 percent that's

fine 2.5 percent fine

whatever when that starts trending down

at some point and if it trends down

right if it trends down and when it

turns down

at some point we're going to hit a new

number let's say that number is

2.4 just for the sake of argument or 2.2

or 2.3

percent whatever whatever that number is

and when that number comes is probably

when the federal reserve is going to

want to say

okay we went through this temporary

cycle of inflation which is

depicted here by these scribbly lines

see right here that's the temporary

inflation that we saw we went through

that period

now inflation readings are starting to

trend

downward and now they're going to settle

at some place

ideally in this this perfectly scripted

world that

scripts always work for anyway when

inflation hits this new

level after the temporary inflation goes

away

the fed will probably be most equipped

to say okay got it so it looks like

inflation is leveling around two and a

half

or two point four percent or two point

two two point three whatever

in order for us to get this continuing

down

to our two percent target now we have

reached the point

where it is time for us to say let's

raise interest rates

to let's say a one percent and maybe

that one percent

federal funds rate up from zero percent

will help push inflation

down to two percent and then we'll find

our happy equilibrium where if inflation

goes down

too low to say 1.9 maybe rates go to

point

you know 0.75 or if inflation

goes up to 2.1 maybe that means we need

to go to 1.25

whatever the point is we play

equilibrium market maker and trying to

figure out where rates should be

so that the market is happy this is all

in my opinion

the dream of the federal reserve and i

say it's a dream because

this vision this dream assumes that

we're not just going to see inflation go

like that which obviously would be very

bad

but knowing that this seems to be the

trajectory of the federal reserve we can

actually now

chart potentially where this

is and now i've already mentioned this

so if you've been watching all the

videos on this channel this part's not

going to be a surprise if you haven't

watched this part yet

that's okay this will be a surprise

because the fed actually gave us that on

us

but it's important to see where that

falls into context which

is the whole purpose of making this

video i'm not trying to rehash old crap

old news

my goal is always to educate and help

you

grasp grasp what the federal reserve

thinks now whether you believe them or

not

is totally different but it's good to

know what the fed thinks

okay and this is obviously my opinion of

what the fed thinks because the fed

as much as they try to tell us they use

like a different language to explain

these things

and they also tend to dodge lots of

questions about this

so what did we hear well today we heard

that uh well first of all i'm going to

make a note here that we'll probably see

that higher inflation that temporary

inflation

in that period of time between april to

july 2020 that's an expectation that

we've had

and that's mostly because in april in uh

six days

we're going to get cpi data and it's

expected to be not pretty

because we're gonna get our first

year-over-year data and we're thinking

inflation's gonna be well over two

percent year-over-year

uh we also want to pay attention to that

month-over-month inflation see what

those stemi checks did

if anything yet it might be too soon for

them to really be counted but anyway

we're definitely expecting higher

readings for the next six months april

to july

august september october and somewhere

around there so not necessarily ending

in july but next six months expecting

that higher inflation

kathy wood over at arc invest she

believes

that inflation will start subsiding or

going

down somewhere around august to

september 2021

i kind of fall into that same boat the

august to october

range uh and so this would mean kathy

right here thinks that inflation starts

inflecting down

and i'm in the same boat over here

somewhere between october august to

october

however the federal reserve gave us

something totally different today

oh the good old fed federal reserve says

we see inflation edging down

in 2022. so if inflation edges down

if this number instead of being august

to october 2021

is actually a 2022 number

then we can expect that some point

between this 2022 number

and a rate increase which is actually

more like over here there we go

somewhere between these points along

this

path here we are going to have the fed

a taper so maybe when we hit the

inflection point they stop

buying as many bonds sometimes this

creates a

taper tantrum in the markets which some

folks think is going to create a really

nice buying opportunity in the stock

market

then after we see the taper we'll see

those rate increases somewhere around 18

months later which if we see the taper

at the beginning of 2022-ish

maybe we'll see those rate increases

somewhere around

mid-2023 which is roughly what the

federal reserve has reiterated

the market sees a rate hike earlier

they see a rate hike in the second half

of 2022 the fed sees a rate hike

in 2023 so this kind of gives you a

trajectory a path

of the madness that we're expecting now

so right now just so you know

we are on a roller coaster we're

ratcheting up ding ding ding ding ding

ding ding ding ding ding ding ding ding

ding ding ding ding

ding and at some point we're just going

to keep ratcheting up on this inflation

number

we don't know how high it's going to go

we have expectations it's going to end

up somewhere around two and a half to

three percent

then we're going to go on the roller

coaster ride down

and the reason it's going to be

everything's going down is because

that's probably when the fed might

consider starting to taper when

inflation edges down

uh and especially as they gear up to

raising interest rates which right now

they expect to do in 2023

which presumably they would do once they

figure out okay how low did inflation go

naturally where did it settle and what

else do we need to do to keep it

going down so

that is my map for the federal reserve

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we'll see in the next video