Massive Rate Cuts coming Soon | Prepare.

All right. So, while we talk about this

Harvard or while they talk about this

Harvard thing, let's do a quick note on

JD Vance and Trump, what they're saying

about the Federal Reserve right now. Uh

JD Vance is apparently arguing that

quote, "The refusal by the Fed to cut

rates is monetary malpractice."

On top of that, on Truth Social, Donald

Trump just wrote, "Cpi just out, great

numbers. Fed should lower one full

point. Would pay much less interest on

debt coming due." so important. I think

this is where it's worth just taking a

moment to talk about the Federal

Reserve, what's likely and what the

market is pricing in. Let's just go

ahead and start by talking about uh what

what the implications of this are,

what's likely and just give you a bottom

line on that. Uh and then I'll also give

you market pricing uh so that way we can

kind of see how market pricing has moved

and what markets are pricing it. So,

first things first, remember that the

president and the vice president are of

course going to always advocate for

lower rates because it's popular. It is

exactly what consumers want to hear.

It's what we want to hear as small

business owners or medium business

owners or employees of large businesses.

Everybody wants lower rates. Lower rates

on your cars, lower rates for home

mortgages. Obvious. So, it's a popular

thing to say. The question is, is this

going to have any influence on the

Federal Reserve? And the answer to that

is likely a big fat no. because the

Federal Reserve, at least as they say,

you know, whether or not we believe it

comes with an asterisk, but they say

they're going to act apolitically. Now,

what is that actually going to mean in

this environment? Well, it likely means

that we're going to see a delay in when

the Federal Reserve is going to do

anything. I think the absolute earliest,

and this is my opinion, that we see the

Fed do anything is September. And the

reason for that is when we get into

September, the meeting's towards the end

of the month, we're going to have

inflationary data for not only what we

just got, May, but we'll also have June,

July, and August. We will literally have

three more full months of inflation

data. And if we reiterate the trend

we're on right now, yes, in my opinion,

we could set up for either a 25 or 50

basis point cut in September. We might

actually get a full cut, full 1% cut

like Trump is clamoring for by the end

of the year if we also by September

start seeing a weakening jobs market.

We're going to have June, July, and

August data, another 3 4 months of data

where tariffs are in place, especially

at this higher level that is now an

agreement between China and the United

States, 55% on China, 10% on the US from

China. These these are bigger levels

than we've had to deal with before.

substantial uh it's basically a doubling

on on tariffs that we've had previously

on China. So toys, furniture, apparel,

these are all going to show up in margin

which could show up in you know weaker

pricing uh at at corporations and again

therefore layoffs. And so the Fed will

look at that data but beyond this we'll

also get through a very weird

environment in markets where you have to

get through what's called the

seasonality of unemployment claims.

Historically, if you look at

unemployment claims in the summer, I

personally think teachers have something

to do with it. You know, teachers sort

of are not working in the summer, but

but not entirely sure on that one. Uh

but there's some seasonal spike you see

in unemployment claims uh in the summer,

and they start coming down in uh the end

of July, early August. The Fed will

basically have a full six week of six

weeks of unemployment claims data by the

time of their September meeting. This is

why September is really setting up to be

such a big meeting. Now, let's see what

the market is pricing in. The market is

pricing in a 0% chance of a rate cut for

June 18th. A 16.5% chance of a rate cut

for July 30th. I think that's highly

unlikely because you're literally one

week away from new jobs and inflation

data uh in August for July. And then you

have the September 17th meeting. Markets

are only pricing in a 60.4% chance of a

cut right now. I actually think there's

even a chance of a double cut in

September should we start seeing even

just a little bit more weakening in the

labor market. And remember the video

that I did on the Beaver Ridge curve,

which I highly encourage you you would

take a look at. I think I called it the

uh the great Donald Trump economic reset

or something like that. I'll pull up the

title for you in a moment, but I

encourage you to watch it. It was one of

those blackboard videos where I go

through a lot of the data uh in in the

studio. Uh it is quote the complete

economic great reset Trump and the Fed.

And basically what I do is I talk about

this economic concept known as the

Beaver Ridge curve or the beaver ridge

curve is so abnormal right now

historically that the only thing that

needs to change. The only single thing

that needs to change to normalize the

curve is a slight uptick in layoffs. And

a slight uptick in layoffs is going to

rapidly move that curve into its normal

environment. And that normal environment

would mean an unemployment rate that

skyrockets over 5 and a half to 6%. Uh

and as we usually see, if we get some a

move like that, we might end up with a

recessionary move after that, especially

thanks to artificial intelligence and

otherwise where you get longerterm

unemployed, you know, up over 10% or

whatever. Now, in that video, there were

some comments where people were saying,

"Oh, but Kevin, the unemployment rate is

only low because they're not counting

the unemployed workers, all the

unemployed workers." Yes, they are. they

are just counted in a different place.

Once you're unemployed for more than 6

months, you get counted in the 27 weeks

unemployed category. It is something

that we pay attention to as well. And

yes, the 27we unemployed category is

rising. And yes, historically, every

time it starts rising, it's a

recessionary signal. Does that mean

we're definitely going into a recession?

No. But if we get anything that is a

slight uptick in layoffs, a slight

uptick in claims, I think we're setting

up for potentially a double cut in

September, and that money printer is

going to come on very rapidly. Now, is

that going to be soon enough to stop a

recession? Nobody knows. It could

already be too late. Maybe it'll be

early enough. However, and this is why I

talked about a few days ago, this idea

that maybe Scott Bessant could end up

becoming the Fed chair, I actually think

is broadly bullish. Now, people left me

comments. You know, Besson's testifying

right now. People left me comments and

they're like, "Oh, but but Kevin, you

know, the Fed chair is just one of the

committee's voting members, right?" But

if you minimize the importance of the

Fed chair in a manner of saying, well,

he's just one of the voters on the

board, the FOMC,

then you misunderstand how the power

structure of the Federal Reserve works.

The chairperson is the person who talks

to each of the individual members

individually and can shape the other

person and sort of lobby them to join in

their vision of the direction of macro.

And if you get somebody like Besset who

wants to look forward and say, "Hey, we

need to prevent this potential recession

from coming." Whereas Powell's more of a

wait for the data to let us know we're

in recession, which is somewhat what it

feels like we have right now. Then you

get someone who is more dovish who

drives the Fed towards more rate cuts

earlier. That comes with the risk of

more inflation. But I personally don't

think we have an environment that risks

more inflation. Now, in response to

that, I get comments of people going,

"But Kevin, prices are so much higher."

Again, it's very important that we don't

confuse the nominal level of prices,

which of course are higher than 2019,

with what an inflation rate is and what

the Federal Reserve's mandate is. The

Federal Reserve's mandate is not to have

low prices. The federal mandate is to

keep prices stable. That could mean

stable high, unfortunately. Just sort of

the way it functions. Uh anyway, going

towards the rest of the year, we have

about a 49% chance. Uh well, it looks

like we're pricing in I'll read it this

way. We're pricing in 1.26 cuts by

October 29th. We're pricing in about

1.92 cuts. So, round it to two cuts by

the end of the year. I actually think

it's likely that we might be closer to

four cuts by the end of the year if some

of that data starts turning around.

We'll see. Uh and at the moment at least

when we look at the treasur market uh

based on this inflation data we got this

morning 10 years still sitting around

4.43. So it's still you know a heavy

weight for small and medium-sized

businesses but that 102 spread is still

only at 48 and really you're not at

shock territory unless that's rising

above 50 like what we saw in the dotcom

bubble and the great recession. Uh and

we're we're just not seeing that yet.

So, in other words, things are still

good until they start turning. Couple

follow-up comments here that I just see

in the comments. Does the bond market

agree? Again, what I read you out with

these odds of Fed rate cuts are based on

Treasury market curves. Okay, so this is

a distillation of the implied overnight

rates from the Fed based on Fed futures

trading. So, yes, the bond market does

cater to that. Somebody says, "If

inflation isn't high, why are stores

more empty than the 2020 lockdowns?"

These are totally unrelated.

Store shelves, first of all, being empty

could be your perception. That doesn't

necessarily mean they're a reality

because uh store shelves are often based

on uh the levels of inventory stock up

or potentially the lack of stock up.

They could be based on supply chain

modifications because of tariffs. If we

look at the Bank of America supply chain

indices, we're actually pretty dang

loose on supply chains. So there could

just be particular delays related to

shipments coming from China thanks to

the liberation month where we had

substantial delays of shipments. But

that that is really unrelated from

inflation of why shelves are empty. It

could be supply chain related. Now can

limited supply chains for a long period

of time create inflation? Yes. That's

because eventually stores if you have

empty shelves for too long you could see

prices increase for what's left. But

that assumes that demand is also rising

and and will match those prices. Demand

in today's environment is not moving up

to match how prices how companies would

like to price. That's why we talk about

corporates having lower pricing power.

So

let's see here. Uh replacing power could

easily lead to Arthur Burns. Um

yes. Yes, you are right about that. What

you're referring to is basically this

idea that if you replace Powell with

Bessant, you could end up getting a

1970s repeat where you get somebody

who's too reactive to the news. I agree

with that. I think Powell is doing

everything in his power to avoid being

an Arthur Burns for a 1970s. We don't

want a 1970s. Powell respects Vulkar

much more as any person who studies

monetary policy agrees. Paul Vulkar

gained much more respect and credibility

than Arthur Burns did.

representative is basically the largest

failure of of uh you know monetary

policy. So this is uh this is this this

is pretty straightforward here. Uh

somebody who says quit blocking for

Trump Kevin I roll emoji. Well, I think

if what you're saying is my opinion that

interest rates are going to come down by

at least a percent because we're

trending towards a recession uh in the

labor market is somehow, you know, uh

hitting the pavement for Trump, then

then I I I think you're trying to look

for something that doesn't exist. I'm

looking at this from a monetary policy

and economic point of view. I think

that, you know, Powell is to some extent

right to avoid wanting to be an Arthur

Burns and waiting for the data. I think,

and this is my opinion, that inflation

will stay low and that Powell will be

late because of that strategy. That

doesn't necessarily because that aligns

with sort of what Trump's saying and

calling Powell Mr. too late doesn't mean

that I'm shilling for Trump. It just

means that my opinion is we should be

cutting sooner. But I understand why

they can't because they want to be data

dependent to avoid the 1970s. My POV

would be more of a gamble because I

would be taking the bet that we're not

going to see inflation and you want to

cut ahead to minimize the recession.

That's different, right? I'm taking an

opinion. Donald uh Powell is waiting for

the fact and that's understandable and I

respect that and I understand the

Federal Reserve doing that and that's

why I'm trying to show you this

difference between my opinion, what the

Fed is doing and then of course why

Trump says what he does because it's

popular.

Anyway, hopefully that helps. uh we're

forgetting about the layoffs announced

in March, government cutting 770K which

uh right right so this is a this is

another thing that is worth paying

attention to is yes you know coming into

September you start getting some of

those uh you know voluntary layoffs at

the government where you got basically

you know through September to go find

another job and get paid through

September even if you quit your job

that's true but those numbers won't

actually show up in our employment data

unemployment data well they could start

showing up earlier but it's likely you

won't actually see those until October.