YIKES! Federal Reserve to Flip Flop Tuesday!

hey everyone meet kevin here we actually

got a monday holiday update from the

federal reserve let's talk about what we

just heard and what meeting was just

scheduled between powell and somebody

else we'll talk about that as well quick

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okay folks let's talk about waller so

waller says that he is open to

supporting 50 basis points at several

more meetings in addition to the ones

that we already have planned we already

had 50 in may 50 june 15 july 50 basis

points of the fed funds rate right and

the expectation for the markets right

now is that we're going to raise the fed

funds rate to somewhere between two and

a half to three percent probably above

the neutral rate which is deemed to be

two and a half so probably two point

seven five to three the market's already

pricing that in now it is at least it

took a while to price that fully it i

mean this last five months of a stock

market kind of collapse here is because

the market has been pricing in oh okay

we're going to be at one and a half by

the end of year oh no we're gonna be at

two at the end of the year oh no we're

gonna be at three at the end of the year

right so now you've got waller though

he's a big fan of being so aggressive

that we don't even have to care whether

it's a demand problem or a supply

problem which he just said in the

interview

with regard to what's causing inflation

the problem is inflation is too high and

it's taking too long to get it down now

this taking too long to get it down is

something that could create issues of

impatience at the fed and it could lead

them to make a policy mistake by hiking

too much and then all of a sudden

inflation does potentially come down at

the same time as they've hiked too harsh

which remember generally their efforts

have a lagging impact on the market so

we usually don't feel the impact of that

fed funds rate until six months after

even though verbally and then in the

stock market the fed can verbally kind

of affect the stock market with just

what their plans are the

latter impacts can take around six

months to actually be felt it used to be

thought that it takes about 18 months to

feel federal reserve monetary policy

efforts but now it's believed that

because of the communications and modern

age and how quick financial markets

react that we could price things in

quicker but still you have a lag here

and so the big thing with waller is he

wants to continue to hike hike until we

start seeing a meaningful excite in

inflation which you can't really blame

him because we're not seeing a

meaningful decline in inflation you look

at the next cpi report and the

expectations for the next one we're

expecting to go from 8.3 inflation down

to 8.2 it's like a 0.1 percent decrease

in inflation that's not enough now the

good news is we already know the fed's

planning on hiking in june and july 50

basis points that's already priced in

the big question is what's going to

happen on the september 20th meeting

well the other thing to consider is

we're going to get guidance not by this

next cpi report but by the three after

that see we're going to get on june 10th

the cpi report for may okay great but

then we have three more coming out after

that the june report on july 13th the

july report on august 10th and the

august report on september 13th those

three need to start showing meaningful

declines in inflation and if we're not

actually getting meaningful declines in

those three reports not the next one but

the three after that then we're gonna

have problems and the worst case

scenario is that we end up stuck

somewhere of an inflation rate of like

six and a half to seven and a half

percent because then the fed is going to

have to painfully paul volcker us

because we'll probably see inflation

expectations rise in the market because

we're not getting them to come down

inflation expectations can be measured

by two things consumer surveys but my

favorite is the five year break even

because we know the fed uses it as well

take a look at the right side over here

2.99 this is the five-year break-even

rate that's

essentially a market's expectation of

inflation you can see how we've really

declined here in our inflation

expectations from this peak over here in

march and we kind of get these sort of

like bobs up and down as long as we do

see this rotate down we do believe and

expect that inflation will also come

down that's the hope fingers crossed

we'll see so the cpi reports are going

to be really really important the last

thing that waller says that we want is

that the public to believe that

inflation will continue to go up because

then he says it becomes economically

difficult and painful to reduce

inflation and he's right because he's

basically talking about then having to

paul volcarus fortunately right now even

the hawk and this is a really important

one in my opinion even the hawk is not

saying we need to paul volcker

even the hawk the most hawkish one is

essentially saying hey like yeah we need

to go above neutral maybe as much as a

percent above neutral that would be

three and a half percent right but we're

not getting any indications from even

the most hawkish person at the fed that

oh we need to

you know rug pull everybody we need to

go for like an eight percent fed funds

rate and and paul volcker us essentially

like what happened in the early 80s

where they raised the fed funds rate to

above the rate of current inflation to

really show markets that were forcing it

down but always remember the big

difference between the early 80s and now

is that inflation expectations were

skyrocketing we just left the dollar so

you know the gold standard seven eight

years before that actually a little bit

more before that and uh expectations

where this is it this is the end of a

monetary regime that is not happening

now which is good but what is happening

is joe biden is going to meet with

powell and you can only imagine that joe

biden who's been sandbagged by a mansion

and cinema who's gotten virtually

nothing done the first his first two

years is probably nervous about losing

both the house and the senate in

november and this is widely expected to

happen and you know that even though

powell and biden should be politically

separate because powell does not work

for the government they work for the fed

and that is not part of the government

you know that biden's got to sit down

powell and probably in some private

meeting go dude man like can we get

inflation down at the same time as we

can pump the stock market back up okay

because trump said in his rallies the

stock market would crash if you like the

biden and i got an election coming up

and uh we need uh

and it's interesting because that

political motivation kind of already

aligns with what we're hearing from the

fed that oh

you know we'll probably pause in

september and just see how things go and

it's like oh okay really so if you pause

in september

and you pause and you go with like 25 bp

hikes let's say september and november

you still have the december meeting

after the election where you could get

more aggressive if you needed to so it

wouldn't surprise me if they go 25

september 25 november worst case

scenario if they need to go higher they

go like 50 75 or something insane in

december and that'll be problematic that

would mean that inflation didn't end up

coming down it wasn't transitory which i

know a lot of people are it was never

transitory kevin let's get over it fine

uh but but very interesting

in my opinion paying attention to what

comes out of that meeting probably going

to be something relatively political

and i'm curious to see what levers

biden's going to try to pull and it'll

be fascinating to see if powell changes

his tune he definitely changed his tune

from the last time they met the last

time they met when uh powell was getting

ready for confirmation all of a sudden

powell became a little bit more hawkish

and started

stopped using the word transitory and

all of a sudden it's like oh my gosh

like we need to speak to the american

people we will get inflation down it's

kind of like to some degree and i hate

saying this he kind of has to play a

little bit as a joe biden puppet and

this kind of similarly this pressure

happened with trump as well trump was

threatening to fire jerome powell back

in 2018 if he didn't stop raising rates

and powell ended up pausing now it could

the argument could be made that don't

worry like

that

powell would have made those decisions

anyway but every time we have these

meetings there tends to be in a little

bit of an inflection point so let's pay

attention to what comes out of that

meeting the meetings on tuesday all

right so thank you so much for watching

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next one thanks bye