What will the Federal Reserve Do Next?
https://www.youtube.com/watch?v=WAMu9tSOyyY
Language: en | ASR: large-v3-turbo @ 0a363e9161cbc7ed1431c9597a8ceaf0c4f78fcf

[00:00:00.530 --> 00:00:06.350] Speaker 1: Hey everyone and thanks for jumping back into the macroverse. Today we're going to discuss
[00:00:06.350 --> 00:00:12.910] Speaker 1: what the Federal Reserve will do at the next FOMC meeting. If you guys like the content
[00:00:12.910 --> 00:00:16.770] Speaker 1: make sure you subscribe to the channel, get the video a thumbs up and check out the
[00:00:16.770 --> 00:00:22.230] Speaker 1: upcoming ITC conference. Ticket prices will be going up in just about a week and a half,
[00:00:22.390 --> 00:00:27.430] Speaker 1: November 1st. So make sure you guys get your ticket if you do want to attend. Let's go
[00:00:27.430 --> 00:00:34.310] Speaker 1: ahead and jump in. So interest rates right now are at 4%. And it's expected
[00:00:34.310 --> 00:00:38.110] Speaker 1: that the Fed will raise again before the end of the year.
[00:00:39.530 --> 00:00:44.510] Speaker 1: Earlier this year, right, we talked about the Fed having to likely raise rates starting at
[00:00:44.510 --> 00:00:49.330] Speaker 1: the September meeting. And when I talked about that, I actually got a lot of pushback on
[00:00:49.330 --> 00:00:53.550] Speaker 1: it. A lot of people said that there was absolutely no way that the Federal Reserve would
[00:00:53.550 --> 00:01:00.070] Speaker 1: raise rates before the midterms. But again, they did it anyways. As it
[00:01:00.070 --> 00:01:06.810] Speaker 1: stands right now, and I think it's unlikely to change a whole lot because we already got
[00:01:06.810 --> 00:01:13.530] Speaker 1: a lot of hot inflation reports. CPI came in hot. The producer price index came in
[00:01:13.530 --> 00:01:20.430] Speaker 1: hot. The inflation reports were somewhat elevated. Despite all
[00:01:20.430 --> 00:01:25.670] Speaker 1: of that, the market doesn't really seem to think there's going to be a rate hike in
[00:01:25.670 --> 00:01:32.510] Speaker 1: October. I think I misspoke in a video not too long ago, where I said that it was an 80 %
[00:01:32.510 --> 00:01:38.410] Speaker 1: chance to raise it's actually an 80 something percent chance to hold rates. So you have an
[00:01:38.410 --> 00:01:45.190] Speaker 1: 80 % chance the Fed is going to hold rates steady. Now, to some degree, the
[00:01:45.190 --> 00:01:50.550] Speaker 1: market is obviously the market today is different than 2018. I'm not trying to imply that
[00:01:50.550 --> 00:01:57.190] Speaker 1: it's the same. But to some degree, this does in feel like deja vu from
[00:01:57.190 --> 00:02:04.010] Speaker 1: 2018. And the reason I say that is because if you actually look at the FOMC meetings
[00:02:04.010 --> 00:02:09.930] Speaker 1: back in 2018, if you scroll down to the September meeting, and you just click on the
[00:02:09.930 --> 00:02:15.330] Speaker 1: statement, you can see that they decided to raise the target range for the Fed funds rate
[00:02:15.330 --> 00:02:21.930] Speaker 1: to two to two and a quarter percent so they raised rates in september of 2018
[00:02:21.930 --> 00:02:28.870] Speaker 1: a midterm year just like they did in 2026 all right now from there at
[00:02:28.870 --> 00:02:34.570] Speaker 1: the next meeting the next meeting was actually what like one or two days after the midterms
[00:02:34.570 --> 00:02:40.950] Speaker 1: it was in november in the november meeting they did not raise rates you can see that they
[00:02:40.950 --> 00:02:47.630] Speaker 1: held rates constant at two to two and a quarter percent So far, that's tracking with what
[00:02:47.630 --> 00:02:54.270] Speaker 1: we're seeing in 2018 as well. A rate hike in September, a pause at the next meeting, the
[00:02:54.270 --> 00:02:59.770] Speaker 1: October to November meeting. What did they do in December back then? Because there was
[00:02:59.770 --> 00:03:06.310] Speaker 1: another meeting in December. And what you'll see is that at that meeting, so a month,
[00:03:06.510 --> 00:03:13.450] Speaker 1: month and a half after the midterms, they raised rates again to 2 .5%. Now, a lot of
[00:03:13.450 --> 00:03:19.530] Speaker 1: people might look at this and say, well, they're going to raise rates in next March and
[00:03:19.530 --> 00:03:20.450] Speaker 1: potentially next June.
[00:03:21.890 --> 00:03:27.710] Speaker 1: This historically is not the best predictor of what's actually going to happen many, many
[00:03:27.710 --> 00:03:31.990] Speaker 1: months out, right? Like a lot of times this just changes constantly. So I would not put a
[00:03:31.990 --> 00:03:38.610] Speaker 1: lot of faith in this. Even the Federal Reserve often gets it wrong. If you look
[00:03:38.610 --> 00:03:45.270] Speaker 1: at the summary of economic projections, the SCP, back in December of
[00:03:45.270 --> 00:03:52.250] Speaker 1: 2018, what you'll see is that the Fed funds rate at the time, you know, for 2018, it says 2
[00:03:52.250 --> 00:03:57.850] Speaker 1: .4, but they were projecting 2 .9 % for 2019,
[00:03:58.770 --> 00:04:02.650] Speaker 1: right? And this is before the pandemic, right? Like, we're not talking about 2020 where
[00:04:02.650 --> 00:04:08.350] Speaker 1: they were projecting 3 .1. We're just saying, look, at the end of 2018, the Fed was
[00:04:08.350 --> 00:04:13.270] Speaker 1: essentially penciling in two more rate hikes in 2019.
[00:04:15.850 --> 00:04:22.710] Speaker 1: If you look today, the market is assuming, let's get past the December meeting,
[00:04:22.870 --> 00:04:28.470] Speaker 1: let's pretend like we're already at four and a quarter. The market is penciling in two more
[00:04:28.470 --> 00:04:30.710] Speaker 1: rate hikes in 2027.
[00:04:32.270 --> 00:04:38.970] Speaker 1: So it's clear that the market does not always know what's going to happen. It often does
[00:04:38.970 --> 00:04:45.870] Speaker 1: not. And the Fed does not often know what's going to happen. Because back in 2018, when the
[00:04:45.870 --> 00:04:52.690] Speaker 1: SEP was calling for two more rate hikes, the Fed didn't raise at all
[00:04:52.690 --> 00:04:59.630] Speaker 1: in 2019. And by the end of 2019, by September or July, they
[00:04:59.630 --> 00:05:06.590] Speaker 1: had already started cutting rates again. So don't look at this to tell you what has
[00:05:06.590 --> 00:05:12.730] Speaker 1: to happen. Because to a large extent, the Federal Reserve just is tracking the two -year
[00:05:12.730 --> 00:05:19.690] Speaker 1: yield, right? If interest rates are going up, it's more than likely because they are trying
[00:05:19.690 --> 00:05:26.170] Speaker 1: to get to the two -year yield. You can see that where the two -year yield goes, the purple
[00:05:26.170 --> 00:05:32.490] Speaker 1: line, the Fed funds rate often follows. And the two -year yield now is elevated above the
[00:05:32.490 --> 00:05:34.350] Speaker 1: Fed funds rate at 4 .76%.
[00:05:36.530 --> 00:05:36.970] UNKNOWN: But
[00:05:36.970 --> 00:05:43.710] Speaker 1: it was also elevated at the end of 2018 as well, right? So think about it like this.
[00:05:44.190 --> 00:05:50.470] Speaker 1: The two -year yield just hit 4 .9%, right? And now it's at 4 .76%, but just a little bit
[00:05:50.470 --> 00:05:57.250] Speaker 1: ago, it hit 4 .9%. At the end of 2018, the two -year yield was at around
[00:05:57.250 --> 00:05:58.370] Speaker 1: 2 .9%.
[00:06:02.510 --> 00:06:09.130] Speaker 1: So the reason why the market perhaps thought that the Fed was going to raise
[00:06:09.130 --> 00:06:10.770] Speaker 1: rates closer
[00:06:12.190 --> 00:06:18.970] Speaker 1: to 2 .9, you can see right here 2 .9, is arguably because that's where the two -year yield
[00:06:18.970 --> 00:06:24.590] Speaker 1: was back then when they penciled it in or around that level. But then the two year yield
[00:06:24.590 --> 00:06:31.070] Speaker 1: came down to where the Fed funds rate was. So what happened is that policy
[00:06:31.070 --> 00:06:37.810] Speaker 1: became restrictive, even though the Fed didn't have to raise anymore. Because if you use
[00:06:37.810 --> 00:06:41.350] Speaker 1: the two year yield as an approximation of the neutral rate, we can all get into all sorts
[00:06:41.350 --> 00:06:46.850] Speaker 1: of discussions as to why or why not that may or might not be the case. But when you look at
[00:06:46.850 --> 00:06:51.930] Speaker 1: the two year yield coming back down to where the Fed funds rate was, then it turned out
[00:06:51.930 --> 00:06:57.550] Speaker 1: that the two rate hikes the Fed had penciled in back then didn't actually have to happen.
[00:06:58.810 --> 00:07:02.750] Speaker 1: What if the same thing happens today? Okay, what if
[00:07:04.110 --> 00:07:11.050] Speaker 1: following the midterms, the two year yield would come back down? Now, if
[00:07:11.050 --> 00:07:17.990] Speaker 1: you look at the, we can look at year -to -date roi of what it did in
[00:07:17.990 --> 00:07:24.970] Speaker 1: 2018 so just looking at at the two -year yield and what we're going to do is we're just
[00:07:24.970 --> 00:07:31.790] Speaker 1: simply going to overlay 2026 and 2018 you can see how the two -year yield went up but then
[00:07:31.790 --> 00:07:38.230] Speaker 1: and it surged into the fomc meeting where they did not raise rates
[00:07:38.230 --> 00:07:43.990] Speaker 1: isn't that interesting you can see the two -year yield topped on november 7th that was That
[00:07:43.990 --> 00:07:47.770] Speaker 1: was basically when the FOMC was.
[00:07:49.250 --> 00:07:54.150] Speaker 1: If you go back and look, you can see the meeting was November 7th to 8th. So back then, the
[00:07:54.150 --> 00:07:56.750] Speaker 1: two -year yield topped on
[00:07:59.020 --> 00:08:06.020] Speaker 1: November 8th, right? The day of the FOMC, where they did not raise rates. So what if
[00:08:06.020 --> 00:08:12.220] Speaker 1: the same thing happens? What if the two -year yield goes up? Maybe it bounces into
[00:08:12.220 --> 00:08:17.560] Speaker 1: midterms, okay? Okay, just bear with me for a moment, right? Two -year yield bounces into
[00:08:17.560 --> 00:08:21.360] Speaker 1: midterms. The Fed does not raise rates.
[00:08:22.900 --> 00:08:28.500] Speaker 1: The long end is spooked by this going into the midterm, so it spikes, but then it comes
[00:08:28.500 --> 00:08:35.060] Speaker 1: down on the other side of it. If the two -year yield were to come back down after the
[00:08:35.060 --> 00:08:41.660] Speaker 1: midterms, and let's say the Fed raises rates in December, then you're getting
[00:08:41.660 --> 00:08:46.760] Speaker 1: awfully close to being back in restrictive territory. Because imagine if the if the two
[00:08:46.760 --> 00:08:51.460] Speaker 1: year yield or imagine if the Fed funds rate goes up to four and a quarter, it goes up to
[00:08:51.460 --> 00:08:57.040] Speaker 1: four and a quarter. And if the two year yield were to drop, then they're basically the same
[00:08:57.040 --> 00:09:03.460] Speaker 1: thing, right? So that is how you could get a situation where they don't necessarily have to
[00:09:03.460 --> 00:09:09.800] Speaker 1: raise rates as much in 2027, just like they didn't have to raise rates as much as they
[00:09:09.800 --> 00:09:16.320] Speaker 1: thought they would have needed to in 2019. So I hope that that I mean, it might be clear as
[00:09:16.320 --> 00:09:21.960] Speaker 1: mud. But hopefully, some of you guys are, you know, picking up what I'm throwing down,
[00:09:22.180 --> 00:09:26.680] Speaker 1: right in the sense that it seems like a very similar setup, right? Like, it feels like the
[00:09:26.680 --> 00:09:29.800] Speaker 1: Fed's behind and they need to raise rates because we're getting these hot inflation reports
[00:09:29.800 --> 00:09:32.920] Speaker 1: and they're just not raising rates more than likely at the october meeting
[00:09:35.180 --> 00:09:35.700] UNKNOWN: again
[00:09:35.700 --> 00:09:41.400] Speaker 1: only like a 16 chance they raise rates so imagine that imagine the two -year yield surges
[00:09:41.400 --> 00:09:47.300] Speaker 1: into that and then following that two -year yield drops the fed raises in december and then
[00:09:47.300 --> 00:09:51.340] Speaker 1: all of a sudden the fed funds rate and the approximation of the neutral rate are nearly
[00:09:51.340 --> 00:09:56.980] Speaker 1: identical so then going into 2027 perhaps they end up holding for a while
[00:09:56.980 --> 00:10:02.880] Speaker 1: it's a compelling narrative right i mean it really is and i mean history doesn't always
[00:10:02.880 --> 00:10:06.960] Speaker 1: repeat itself but it certainly does rhyme i just want people to be aware of of that
[00:10:06.960 --> 00:10:11.160] Speaker 1: potential outcome because i remember you know looking at some of this stuff back then and
[00:10:11.160 --> 00:10:15.800] Speaker 1: thinking like okay they're gonna like they're gonna have to raise rates the the scp is
[00:10:15.800 --> 00:10:22.780] Speaker 1: calling for two more rate hikes in 2019 and those rate hikes never actually happened. So I
[00:10:22.780 --> 00:10:28.140] Speaker 1: could see us getting one more rate hike in December. But after that, I would I would not be
[00:10:28.140 --> 00:10:33.040] Speaker 1: so deterministic. Okay, I think one more rate hike is in the cards before the end of the
[00:10:33.040 --> 00:10:40.020] Speaker 1: year. But once we get out of 2027, you have to start to wonder if the long
[00:10:40.020 --> 00:10:46.340] Speaker 1: end going up as much as it has, if that's going to start to weigh on on businesses.
[00:10:46.700 --> 00:10:52.380] Speaker 1: And if it does, and you start to see growth scares, then there's not going to be, you know,
[00:10:52.580 --> 00:10:58.960] Speaker 1: those rate hikes just simply might not manifest at all. Okay, so, and remember with the
[00:10:58.960 --> 00:11:04.140] Speaker 1: long end, what normally happens in the last couple of midterm years is it tops in October,
[00:11:04.760 --> 00:11:10.540] Speaker 1: it puts in a top in October, it then drops, and then it rallies back into the midterms.
[00:11:11.140 --> 00:11:12.440] Speaker 1: Sometimes it's a higher high,
[00:11:13.660 --> 00:11:19.820] Speaker 1: sometimes it's a lower high, and then it drops after the midterms. So I feel like the
[00:11:19.820 --> 00:11:25.820] Speaker 1: playbook's there and it's like, it seems like this is what's likely going to happen. So
[00:11:25.820 --> 00:11:31.060] Speaker 1: let's see if it does, because if it does, then we might just be running the same playbook
[00:11:31.060 --> 00:11:36.240] Speaker 1: eight years later. Right. So those are my views. My guess is the Fed's not going to raise
[00:11:36.240 --> 00:11:42.560] Speaker 1: rates in October, which is coming up in about nine days, the FOMC meeting about nine days.
[00:11:42.740 --> 00:11:48.500] Speaker 1: I'm guessing they're not going to raise rates. I think you'll likely see you know yields go
[00:11:48.500 --> 00:11:52.100] Speaker 1: back up into the midterms and then after that you'll see them fall and then as they're
[00:11:52.100 --> 00:11:56.320] Speaker 1: falling in December the federal raise rates again that'll get the fed funds rate basically
[00:11:56.320 --> 00:12:00.740] Speaker 1: equivalent to the two -year yield and then from there I'm guessing they might end up
[00:12:00.740 --> 00:12:05.480] Speaker 1: holding for a while in 2027. If you guys like the content make sure you subscribe to the
[00:12:05.480 --> 00:12:09.260] Speaker 1: channel give the video a thumbs up also check out the sale on Into the Cryptoverse Premium
[00:12:09.260 --> 00:12:13.900] Speaker 1: at into the cryptoverse .com and as a reminder make sure you get your ticket to the
[00:12:13.900 --> 00:12:18.660] Speaker 1: upcoming investing through the cycles conference taking place in Miami uh main conference
[00:12:18.660 --> 00:12:22.220] Speaker 1: day will be November 21st we'll have some stuff going on November 20th as well links in the
[00:12:22.220 --> 00:12:25.220] Speaker 1: description below or the pinned comment I will see you guys next time bye