*7 Rate Cuts* | What Powell Said Today

Powell day two meeting done. Bottom line

that we got out of what happened with

Powell and the Fed today. Here you go.

First, Morgan Stanley is yapping about

how the Federal Reserve will delay its

rate cuts until March of 2026,

but then they will cut seven times in

2026. So, basically, if you've been

betting on rate cuts, tariffs have now

delayed rate cuts by three to n months.

Uh, and here you go. This is where they

talk about tariffs. And so, sorry if

you've been betting on rate cuts. Donald

Trump delayed that. And now it's all

going to get backloaded to 2026, says

Morgan Stanley. Now, they're predicting

seven rate cuts next year. And a lot of

people on social media are saying, "Oh

my gosh, if the Fed cuts this much,

there's probably a really big underlying

problem."

And that could be true. But what I'd

like to do first is look at what the

market is already pricing in for 2026.

Because in my opinion, it's the delta

that matters. You know, if the market is

pricing in two rate cuts for 2026 and

Morgan Stanley is predicting seven,

that'd be a problem, right?

But if the market's pricing in a lot of

rate cuts, maybe it's not that big of a

deal. So what we could do is we could

look at futures markets and understand,

okay, how what's trading, you know, what

what are what's the futures market

basically saying in terms of where the

Federal Reserve Fed futures funds rate

will be at the end of 2026?

And the answer is actually five rate

cuts. Uh so markets are currently

pricing in uh negative 1.25% 25%

uh in rate cuts by the end of 2026. That

would bring us to about 3.25

uh 3 to 3.25. Whereas Morgan Stanley is

predicting about 2 and a half to 2.75.

So that extra kind of twoish rate cuts

in there. Markets are projecting that we

will have by the end of this year about

2.4 rate cuts. So slightly closer to two

than three, but it's a little bit of a

tossup. And that's as of December 10th.

third rate cut almost fully priced in

for January 28th. That's my birthday,

2026. Uh and then you have um you know

rate cuts just sort of even evenly

scattered throughout 26. So this isn't

very far away from what futures markets

are already pricing in. So I don't

necessarily think this is uh something

that indicates oh you know we've got

really big problems coming. However,

Powell did today spend more time talking

about the concept of the Beaver curve,

or it's spelled Beaver, but it's

technically pronounced beverage curve,

which I think sounds really weird

because it's like, are we talking about

like beverages like beer and, you know,

coffee or what? But anyway, uh on the uh

e-hack app, which you can get, you know,

you just throw in Meet Kevin into your

Android or Apple app store, you'll see

the Meet Kevin app. And what what we did

is I I I threw in here the normal versus

the abnormal

uh charts for the beverage curve. And

it's worth just doing a quick

understanding of it because Powell does

talk about this today during his Senate

meeting. He talked about how low

vacancies and low hiring could normalize

and lead to a significant jump in

unemployment. We've talked about this

before, so it's just worth briefly

rehashing. This is the big concern that

I think is driving a lot of the Fed

officials to start thinking we need

preemptive cuts. You know, I know that

there's this concern that there's going

to be inflation coming. I mean, Powell

mentions it himself. He says the

majority of forecasters right now are

looking at a significant increase in

inflation by the end of the year. We

just don't know how big that impact is

going to be or when it's going to

happen. The good news though is housing

services are going to be an anchor

because rents have finally stabilized

and some markets are negative. You house

hack, for example, we saw rents going

negative when we were exploring areas

like in Arizona or Texas in 2022 and

2023. And it was a warning sign for us

not to invest in those markets because

there was an oversaturation of product.

And so that's why we stayed out of those

markets. And sure enough, those markets

have had more problems with price than

the markets we ended up investing in.

Real estate's really slow moving. So,

you can kind of see this happening. But

rents aren't moving like they were

during COVID, which is really important

because it means it's going to weigh

down consumer price inflation over the

next few years, which is actually really

conducive towards rate cuts because

housing makes up about 35% of the CPI

inflation reading and about 25% of what

the Fed uses, the PCE inflation

readings. So housing's a huge component.

Obviously, when we go look at the

inflation reports in the coming weeks,

what we want to pay attention to are

goods inflation levels, which I expect

to see more of in the producer price

side than on the consumer side. Uh but

that said, if we don't if those

forecasts are wrong and JPAL's wrong

that, you know, there's this big wave of

tariff inflation coming, you know,

following our June 9th expiration of the

Liberation Day pause, hopefully we get

some negotiated deals, then then yeah,

the path to cutting rates could be that

we're cutting because we don't need high

rates anymore because of uh inflation

coming down or or or normalizing. Or it

could be like JPAL said yesterday, hey,

growth is slowing and low vacancies and

low hiring could end up normalizing

leading to a significant jump in

unemployment. And this is where we get

to this beverage curve, which very

briefly, you may have seen it before.

I'll just quickly explain it again. It's

very, very important because where we

sit right now is very abnormal. Here is

a more normal beverage curve from 2000

to 2019 and it shows this downward

sloping relationship. It's really

simple. when job openings are really

really high, unemployment tends to be uh

uh you know on the low side. So here's

the unemployment rate over here. So if

you get low unemployment, you go to the

left, high job openings, you go to the

top, you get a normal position on the

curve. If you get high or sort of low

job openings, you tend to see the

unemployment rate in the high

environment over here. So you've got

high unemployment and low job openings.

But this is not where we are right now.

We sit in a very unusual place where job

openings have collapsed on the left side

of the curve. And we're actually

plotting dots on this left side right

here between 2023 and 24. In fact,

here's a snapshot of what the beverage

curve looks like right now. And all of

these dots right here are 2023 and 24.

So this abnormal curve, very abnormal,

has been building since the, you know,

post-pandemic distortions. And the that

what JPAL is really concerned about is

that when this normalizes

we are going to see uh you know where we

are at this very very low level of

vacancies. We would expect to see this

curve normalize and if the curve

normalizes to you know this level over

here where job vacancies are right now

very very low well we could be at a 12

to 14% unemployment rate. What's

interesting though is while job openings

have been plummeting, they've really

plummeted to levels that we last saw in

2019 and 2018. And this is where a lot

of people say we don't necessarily have

to see a big surge of unemployment. So a

lot of this is just COVID distortion

right here that shows yes the job

openings rate is plummeting. Uh but when

we look at the actual nominal level of

job openings, the nominal level of job

openings is sort of consistent with this

expansionary level we saw in 2018 2019.

Although we've seen structurally higher

job openings and one of the other

distortions of this could be that we

have fewer people getting into trades

and manufacturing now which makes it

even harder uh to compare to the past.

But let's look at the rate of change and

and let's to try to get rid of some of

these distortions over time. Let's look

at the actual percent change from a year

ago and let's go with a quarterly here

just to smooth it out. There we go. And

so what you can see is when you're

negative, you're usually in like a 2007

to 2008 period. This unfortunately only

goes back to 2002. It does show you a

negative level in 2002. Negative level

in 2008 to 9. negative level during

COVID, even leading up to COVID, very

briefly in 2017 on a quarter negative

over here. And then we've really been

negative on this job openings course

since 2023. And this is why a lot of

people are like, "Oh, you know, we're

just we're just normalizing. We're just

normalizing." Uh, but the the broad

question is what keeps the labor market

together right now? Well, right now, the

only thing that keeps it together is the

lack of layoffs. Because if you end up

in a place where you have layoffs in

this sort of environment and then you

normalize out to the right, there's

there's no job for you to get anymore.

And this is what we're seeing a lot of

with the Fed is the Fed's talking about,

hey, it's actually if you have a job,

you're good. But if you've lost your

job, that's where things end up getting

painful. Uh, and so that kind of gives

us a little bit of color on Morgan

Stanley's talk about seven rate cuts,

the concern the Fed has like, is this a

normalization? or we going to break out,

you know, into a disgusting direction.

At the same time, the 102 yield curve is

sitting in shock territory again at 52.

So, nothing major new from Powell today.

This is more of a reiteration of what

we've been expecting, but uh you do get

this talk from Morgan Stanley about

seven rate cuts coming next year. And uh

hopefully it's just because of a

normalization of inflation, but if we do

get a layoff spike, then we end up with

problems. I mean, look at what's going

on with Microsoft, for example. you're

getting these thousands of sort of

rolling layoffs almost every single

month. You know, last month it's the

sales division, this month it's Xbox,

you know, whatever. What you're also

finding is a lot of the big tech

companies got a lot of heat in 2022 for

conducting these massive sudden layoffs

and now they're preferring this sort of

like monthly rolling layoff because it

gets less attention than mass layoffs

all of a sudden. So that could be

another dynamic that that sort of slowly

breaks the back of the labor market. Not

great. Also looking at what's going on

in stocks right now, Tesla bounced very

close to our 318 level, which we talked

about in the alpha report heavily over

the last few days. Uh talked about

rejecting 347, not wanting to bet on a

surge of Tesla that it was likely to

trend towards 318. It's exactly what

ended up happening. We also talked about

how uh circle was very likely to trend

back to its 210 retracement line. And

given that we're now at 3 days of a

falling momentum on circle, we might end

up falling right through 210. And sure

enough, look at this. We bounce at 210.

We bounce at 210. We lose 210. Then we

reject 210. I don't know how much more

bearish you can get. And sure enough,

now we're trending right back down. Next

stop looks like it's 182. Make sure

you're part of the alpha report over at

mekevin.com. If you haven't signed up

yet, check it out. mekevin.com. Use

coupon code JPOW, appropriate naming for

it. Uh and uh you get lifetime access.

We've got lifetime access open uh right

now. So check it out over at mke.com.

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 Praath there, financial

analyst and YouTuber, Meet Kevin. Always

great to get your take.