# What will the Federal Reserve Do Next?

Source: [YouTube](https://www.youtube.com/watch?v=WAMu9tSOyyY)

## Introduction and current interest rates

**Speaker 1:** [00:00](https://www.youtube.com/watch?v=WAMu9tSOyyY&t=0.53s) Hey everyone, and thanks for jumping back into the macroverse. Today we're going to discuss what the Federal Reserve will do at the next FOMC meeting. If you guys like the content, make sure you subscribe to the channel, give the video a thumbs up, and check out the upcoming ITC conference. Ticket prices will be going up in just about a week and a half, November 1st. Make sure you get your ticket if you do want to attend.

Let's go ahead and jump in. Interest rates right now are at 4%, and it's expected that the Fed will raise again before the end of the year.

## Expectations for the October meeting

**Speaker 1:** [00:39](https://www.youtube.com/watch?v=WAMu9tSOyyY&t=39.53s) Earlier this year, we talked about the Fed having to likely raise rates starting at the September meeting. When I talked about that, I actually got a lot of pushback on it. A lot of people said that there was absolutely no way that the Federal Reserve would raise rates before the midterms. But again, they did it anyways.

As it stands right now—and I think it's unlikely to change a whole lot because we already got a lot of hot inflation reports—CPI came in hot. The producer price index came in hot. The inflation reports were somewhat elevated. Despite all of that, the market doesn't really seem to think there's going to be a rate hike in October.

I think I misspoke in a video not too long ago, where I said that it was an 80% chance to raise. It's actually an eighty-something percent chance to hold rates. You have an 80% chance the Fed is going to hold rates steady.

![CME FedWatch conditional meeting probabilities, including the October 28, 2026 meeting, at 01:30.](figures/frame_0090000.png)

## Comparing the 2018 FOMC meetings

**Speaker 1:** [01:38](https://www.youtube.com/watch?v=WAMu9tSOyyY&t=98.41s) Now, to some degree, the market today is different than 2018. I'm not trying to imply that it's the same. But to some degree, this does feel like déjà vu from 2018.

The reason I say that is because if you actually look at the FOMC meetings back in 2018, if you scroll down to the September meeting and click on the statement, you can see that they decided to raise the target range for the Fed funds rate to 2% to 2.25%. They raised rates in September of 2018, a midterm year, just like they did in 2026.

From there, at the next meeting—the next meeting was actually one or two days after the midterms; it was in November—in the November meeting, they did not raise rates. You can see that they held rates constant at 2% to 2.25%. So far, that's tracking with what we're seeing in 2018 as well: a rate hike in September, a pause at the next meeting, the October-to-November meeting.

What did they do in December back then? Because there was another meeting in December. What you'll see is that at that meeting, a month, month and a half after the midterms, they raised rates again to 2.5%.

Now, a lot of people might look at this and say, well, they're going to raise rates next March and potentially next June.

## Why rate projections can change

**Speaker 1:** [03:21](https://www.youtube.com/watch?v=WAMu9tSOyyY&t=201.89s) This historically is not the best predictor of what's actually going to happen many, many months out. A lot of times this just changes constantly, so I would not put a lot of faith in this. Even the Federal Reserve often gets it wrong.

If you look at the Summary of Economic Projections, the SEP, back in December of 2018, what you'll see is that the Fed funds rate at the time, for 2018, says 2.4, but they were projecting 2.9% for 2019. This is before the pandemic. We're not talking about 2020, where they were projecting 3.1. We're just saying, look, at the end of 2018, the Fed was essentially penciling in two more rate hikes in 2019.

![December 2018 economic projections table, including the Federal funds rate projections discussed by Speaker 1, at 03:50.](figures/frame_0230000.png)

If you look today, the market is assuming—let's get past the December meeting; let's pretend like we're already at 4.25—the market is penciling in two more rate hikes in 2027.

It's clear that the market does not always know what's going to happen. It often does not. And the Fed does not often know what's going to happen, because back in 2018, when the SEP was calling for two more rate hikes, the Fed didn't raise at all in 2019. By the end of 2019, by September or July, they had already started cutting rates again.

## The two-year yield and restrictive policy

**Speaker 1:** [04:59](https://www.youtube.com/watch?v=WAMu9tSOyyY&t=299.63s) Don't look at this to tell you what has to happen, because to a large extent, the Federal Reserve just is tracking the two-year yield. If interest rates are going up, it's more than likely because they are trying to get to the two-year yield.

You can see that where the two-year yield goes, the purple line, the Fed funds rate often follows. The two-year yield now is elevated above the Fed funds rate at 4.76%.

![Chart showing the purple two-year yield line and white stepped Fed funds rate line, as described by Speaker 1, at 05:25.](figures/frame_0325000.png)

**UNKNOWN:** [05:36](https://www.youtube.com/watch?v=WAMu9tSOyyY&t=336.53s) But

**Speaker 1:** [05:36](https://www.youtube.com/watch?v=WAMu9tSOyyY&t=336.97s) it was also elevated at the end of 2018 as well. Think about it like this: the two-year yield just hit 4.9%. Now it's at 4.76%, but just a little bit ago, it hit 4.9%. At the end of 2018, the two-year yield was at around 2.9%.

The reason why the market perhaps thought that the Fed was going to raise rates closer to 2.9—you can see right here, 2.9—is arguably because that's where the two-year yield was back then when they penciled it in, or around that level. But then the two-year yield came down to where the Fed funds rate was.

What happened is that policy became restrictive, even though the Fed didn't have to raise anymore. Because if you use the two-year yield as an approximation of the neutral rate—we can all get into all sorts of discussions as to why or why not that may or might not be the case—but when you look at the two-year yield coming back down to where the Fed funds rate was, then it turned out that the two rate hikes the Fed had penciled in back then didn't actually have to happen.

## A possible post-midterms scenario

**Speaker 1:** [06:58](https://www.youtube.com/watch?v=WAMu9tSOyyY&t=418.81s) What if the same thing happens today? What if, following the midterms, the two-year yield would come back down?

We can look at year-to-date ROI of what it did in 2018. Just looking at the two-year yield, what we're going to do is simply overlay 2026 and 2018. You can see how the two-year yield went up, and it surged into the FOMC meeting where they did not raise rates. Isn't that interesting? You can see the two-year yield topped on November 7th. That was basically when the FOMC was.

![US2Y year-to-date ROI chart overlaying the lines labelled 2018 and 2026, at 07:30.](figures/frame_0450000.png)

If you go back and look, you can see the meeting was November 7th to 8th. Back then, the two-year yield topped on November 8th, the day of the FOMC, where they did not raise rates.

What if the same thing happens? What if the two-year yield goes up? Maybe it bounces into midterms. Just bear with me for a moment: two-year yield bounces into midterms. The Fed does not raise rates. The long end is spooked by this going into the midterms, so it spikes, but then it comes down on the other side of it.

If the two-year yield were to come back down after the midterms, and let's say the Fed raises rates in December, then you're getting awfully close to being back in restrictive territory. Imagine if the two-year yield—or imagine if the Fed funds rate goes up to 4.25. It goes up to 4.25, and if the two-year yield were to drop, then they're basically the same thing.

That is how you could get a situation where they don't necessarily have to raise rates as much in 2027, just like they didn't have to raise rates as much as they thought they would have needed to in 2019.

It might be clear as mud, but hopefully some of you guys are picking up what I'm throwing down, in the sense that it seems like a very similar setup. It feels like the Fed's behind and they need to raise rates because we're getting these hot inflation reports, and they're just not raising rates, more than likely, at the October meeting.

## Uncertainty beyond December

**UNKNOWN:** [09:35](https://www.youtube.com/watch?v=WAMu9tSOyyY&t=575.18s) again

**Speaker 1:** [09:35](https://www.youtube.com/watch?v=WAMu9tSOyyY&t=575.7s) only like a 16% chance they raise rates. Imagine that: imagine the two-year yield surges into that, and then following that, the two-year yield drops. The Fed raises in December, and then all of a sudden the Fed funds rate and the approximation of the neutral rate are nearly identical. Going into 2027, perhaps they end up holding for a while.

It's a compelling narrative. It really is. History doesn't always repeat itself, but it certainly does rhyme. I just want people to be aware of that potential outcome, because I remember looking at some of this stuff back then and thinking, okay, they're going to have to raise rates. The SEP is calling for two more rate hikes in 2019, and those rate hikes never actually happened.

I could see us getting one more rate hike in December. But after that, I would not be so deterministic. I think one more rate hike is in the cards before the end of the year. But once we get out of 2027, you have to start to wonder if the long end going up as much as it has, if that's going to start to weigh on businesses. If it does, and you start to see growth scares, then those rate hikes just simply might not manifest at all.

## The midterm-year playbook and final outlook

**Speaker 1:** [10:52](https://www.youtube.com/watch?v=WAMu9tSOyyY&t=652.58s) Remember, with the long end, what normally happens in the last couple of midterm years is it tops in October. It puts in a top in October, it then drops, and then it rallies back into the midterms. Sometimes it's a higher high, sometimes it's a lower high, and then it drops after the midterms.

I feel like the playbook's there, and it seems like this is what's likely going to happen. Let's see if it does, because if it does, then we might just be running the same playbook eight years later.

Those are my views. My guess is the Fed's not going to raise rates in October, which is coming up in about nine days—the FOMC meeting, about nine days. I'm guessing they're not going to raise rates. I think you'll likely see yields go back up into the midterms, and then after that you'll see them fall. As they're falling in December, the Fed will raise rates again. That'll get the Fed funds rate basically equivalent to the two-year yield, and then from there, I'm guessing they might end up holding for a while in 2027.

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**Speaker 1:** [12:05](https://www.youtube.com/watch?v=WAMu9tSOyyY&t=725.48s) channel, give the video a thumbs up. Also check out the sale on Into the Cryptoverse Premium at intothecryptoverse.com. As a reminder, make sure you get your ticket to the upcoming Investing Through the Cycles conference taking place in Miami. The main conference day will be November 21st. We'll have some stuff going on November 20th as well. Links in the description below or the pinned comment. I will see you guys next time. Bye.