Last week financial markets pumped after The Federal Reserve announced that it Would be raising interest rates by 0.25 Percent This was in line with investor Expectations hence the resulting Market Rally prices also went up because of What fed chairman Jerome Powell said During the subsequent press conference His rhetoric exceeded investors Expectations but they seem to have Missed some important details that's why Today I'm going to summarize what Jerome Said at the press conference revealed Those important details that investors Seem to have missed and reveal what they Could mean for the markets Let's start with a brief recap the fed And other central banks have been Raising interest rates to fight Inflation since the spring of last year Higher interest rates makes it harder to Borrow and makes existing debt more Expensive which is basically why the Markets crashed there are just two Caveats here the first is that Markets Started crashing long before the FED Started raising rates this is because The markets are forward-looking the news Of something good or bad coming up Causes prices to rise or fall in Anticipation Jerome announced the fed's rate hikes in Late 2021 hence the late 2021 early 2022
Crash now the second is that the markets Have been rallying since late last year Despite short-term rates being high this Is because investors are convinced that The FED will pivot I.E lower interest Rates because of a severe recession Something in the financial system Breaking or because inflation is coming Down and because the markets are Forward-looking the price of everything From stocks to cryptocurrencies is Rising in anticipation of a rate cut Sometime later this year for context the FED is currently expected to raise rates Up to around five percent before pausing And pivoting shortly after rates are Currently 4.5 to 4.75 percent There are just three problems with these Investor expectations the first is that The future recession that the markets Have been pricing in is looking less Severe by the day now in theory this is A good thing because it means the Economy will be fine in practice however It's not because it means the FED won't Have to lower rates the second is that Institutions in the traditional Financial system have lots of money to Absorb the shock of higher interest Rates this is in part because of all the Fiscal stimulus during the pandemic and In part because institutions Conveniently had lots of time to lock in Lower interest rates for their debt
The third problem is that inflation may Not come down as quickly as investors Are expecting or it may not fall to the Two percent inflation Target that needs To be reached for the FED to Pivot Now there are many factors which could Cause inflation to remain high and China's reopening is just one of them if You watched our video about China's Reopening you'll know that it could Increase Services related inflation Around the world as Chinese tourists Spend the hundreds of billions they Saved up during the pandemic this is bad News for the FED which is now Exclusively fighting services-related Inflation the fed's proxy for Services-related inflation has Essentially been unemployment if Unemployment is low then it means that Employees can demand higher wages if These wage increases are above the fed's Two percent inflation Target like they Are now then these wage increases risk Fueling further inflation this means That the FED needs to increase Unemployment in order to Pivot put Differently it needs lots of people to Lose their jobs now despite all the tech Layoffs the latest data suggests that Unemployment is falling not Rising this Could be mean no recession but that Means no pivot which means markets crash And yet the markets continue to Rally
Ironically enough this could make the Services related inflation the FED is Fighting even worse because Rising Markets increase the likelihood of early Retirement more early retirement means Fewer people in the workforce this means Higher wages but also higher inflation So now that you're up to speed with the Situation we can unpack chairman Powell's speech at the fed's press Conference last week Jerome began by Making it clear that the FED is Committed to Bringing inflation back Down to the fed's two percent Target and Although it has raised rates by a lot There are more raises to go he revealed That the FED decided to raise rates by 0.25 but caution that ongoing increases Will be required to bring inflation back Down now if you watched our video about The minutes of the fed's December Meeting you'll know that most fed Officials are aiming for a final Interest rate of 5.25 percent this means That the FED will be raising interest Rates by 0.25 at least twice more but as I mentioned earlier investors are Currently pricing in one rate hike at The fed's next meeting in March the March meeting is also when fed officials Will reveal their new interest rate Targets take note anyway Jerome went on To remind everyone that the FED is also Actively reducing the size of its
Balance sheet this is code for selling U.S government and Mortgage Debt all you Need to know is that this selling causes Interest rates to rise though it's not Clear how much of an effect this selling Is having just yet Jerome went on to Give a review of current economic Conditions and started by saying that 2022 saw a significant decline in Economic output on that note some macro Analysts have started to speculate Whether the recession already happened Last year again this would mean no fed Pivot in 2023 In any case Jerome highlighted the 50-year low in unemployment and the Resulting elevated wage growth as two Inflationary concerns for the FED he Pointed out that while it's great that Inflation has come down over the last Few months it is still very far away From the fed's two percent Target Jerome Then said something he's been saying for Months now and that's that the FED needs To see quote substantially more evidence That inflation is coming down before it Even thinks about pausing or pivoting This begs the question of what evidence The FED is looking for more about that Later Jerome admitted that it will take time For the fed's rate hikes to affect the Actual economy as such the FED will be Sticking to 0.25 rate hikes for now much
Less than the jumbo 0.75 and 0.5 rate Hikes it was dishing out last year For reference it typically takes around A year for interest rates to affect the Economy given that the fed and other Central banks started raising rates last Spring this means we should start to see The effects of higher interest rates on The economy pretty soon Jerome reiterated that we could expect To see softness in economic conditions And higher unemployment but this has yet To happen Jerome then concluded his Speech by repeating his favorite line And that's that the FED is determined to Bring demand back in line with Supply he Again referenced the 1970s by saying That history suggests that easing too Soon is a mistake and stressed that the FED will keep at it quote until the job Is done after Jerome's speech the press Part of the press conference began The first question came from a reporter At the Associated Press they asked Jerome if the quote loosening of Financial conditions will make it harder For the FED to fight inflation and If The Fed will have to raise rates higher As a result Ing that this was a reference to the Ongoing Market rally Jerome responded by Saying that the FED wants to see Financial conditions reflect the fed's Restrictive policy he then said that
Financial conditions have tightened Significantly and not to pay too close Attention to short-term price action the Markets rallied in response to the idea That Financial conditions had tightened Because it's clearly not the case However it's the second part of what Jerome said here that investors seem to Have missed Jerome implied that other Temporary non-fed factors are driving The supposed recovery rally This seems to have been a not so subtle Reference to the U.S treasury Department Which has been emptying its treasury General account into the economy this Has to do with the U.S government Recently hitting its debt ceiling that Is a topic for another video which you Can find down in the description Now the second question came from a Reporter at the Washington Post they Asked Jerome whether the Fed was still Focused on unemployment given that Inflation appears to be coming down on Its own Jerem said that the disinflationary Trend we're seeing is still in its early Stages not surprisingly the markets Rallied in response to this comment too But investors again failed to hear the Second part of Jerome's response he said That Services inflation will continue to Run hot for some time and said that the FED will have an updated forecast for
Interest rates at the March meeting The third question came from a reporter At axios they asked Jerome whether the FED is watching job openings not just Unemployment statistics Jerome said yes And acknowledged that job openings are Coming down but underscored the fact That there's still two jobs available For every unemployed person the fourth Question came from a reporter at the Financial times they asked Jerome Whether the fed's previous projections For a final interest rate of 5.25 Percent were still in play Jerome Replied that the risk of doing too Little is bigger than doing too much and Stressed that it's premature to declare Victory on inflation the fifth question Came from a reporter at Reuters they Asked Jerome why the FED removed all References to the pandemic and the war In Ukraine from their announcement Accompanying the rate hike Jerome dodged The question a bit by pointing out that Inflation is slowly starting to come Down obviously this caused the markets To Rally even more and investors again Missed the significance of Jerome's Response call me crazy but the FED Removing references to the pandemic and The war in Ukraine suggests that they Know that neither of the two will be Lasting for much longer now this sounds Like speculation but it's based on the
Fact that the Fed was extremely Concerned about the inflationary effects Of the pandemic and the war in Ukraine During their December meeting now these Concerns are gone and the U.S is also Expected to announce the end of the Pandemic emergency in May let's hope This doesn't mean the people in power Are about to create another crisis Anyways the sixth question came from a Reporter at the Washington Post and they Asked too the first was why the FED is Still raising rates if inflation is Coming down and the second is whether The FED discussed a pause during their Meeting note that the minutes of Meetings are released three weeks later To the first question Jerome said it's Because inflation is still too hot and That interest rates must be positive Across the entire yield curve in other Words long-term interest rates have to Be higher than inflation and they are Nowhere close to that yet To the second question Jerome said wait Until the minutes and the markets Rallied again The seventh question then came from a Reporter at Politico they asked Jerome An important one and that's what the FED Will do if the U.S government starts to Default in June Jerome realized this was A political question so he answered in a Political way it's up to Congress to
Decide and that is all The eighth question came from a reporter At the New York Times They asked Jerome Whether the Fed was planning on pausing And if there would be pauses between Rate hikes Jerome said that the FED is Not planning on pausing anytime soon but Admitted that pauses between rate hikes Were possible you can guess what the Markets then did The ninth question came from a reporter At CNBC they asked Jerome why the FED is Still fixated on increasing unemployment If inflation is coming down especially As fed Vice chair lail Brainerd had Recently said that wage growth was not Contributing to inflation very clever Question Jerome said something odd and that's That quote this is not like other Business Cycles in so many ways he also Said that it's going to take a lot more To convince the FED to start lowering Interest rates and suggested that there Could be a soft Landing no recession all Things to keep in mind folks speaking of Which lail is reportedly being Considered for a senior advisor position At the White House This suggests that she might leave the Fed this is significant because lail is A dove she wants to see lower interest Rates she could be replaced with someone Who wants higher interest rates a hawk
In any case the 10th question came from A reporter at Bloomberg they asked Jerome about economic growth pointing Out that indicators suggest a recession Is imminent namely the inversion of the Yield curve Jerome said a recession may Not happen in part because of all the Pandemic stimulus like I said this Reminds me of another headline and That's that Campbell Harvey the person Who made the discovery that a recession Always follows a yield curve inversion Said that this time could be different Meaning no recession now this time is Different is a dangerous saying but I Reckon this is a bit well different The Bloomberg reporter then managed to Squeeze in a second question and that's What kind of evidence the FED is looking For to lower interest rates Jerome Emphasized that it won't be like Flicking a light switch there needs to Be an accumulation of evidence that Inflation is coming down The 11th question came from a reporter At Fox Business they asked Jerome two Questions how hard it will be to bring Inflation back down to two percent and How long will interest rates stay high Jerome said that it's too soon to know For sure and that so far the data Suggests rates should stay high until 2024. Somehow the markets rallied even more
And if you're tired of missing all these Local tops in the crypto Market you can Check out our video about how to spot The top using the link in the Description anyhow the 12th question Came from a reporter at The Economist They asked Jerome about the discrepancy Between the additional .25 rate hike Investors are expecting and the 2.25 Rate hikes that the FED is projecting You'll hopefully recall I touched on This earlier as well Jerome said he's Not concerned about the discrepancy Because it's possible that inflation Will come down quickly it's just that Investors think that inflation will come Down much faster than the FED does Investors think that inflation will be At two percent by the summer the FED Sees inflation at 3 percent by Year's End The 13th question came from a reporter At NPR they double checked with Jerome About the pandemic asking if the FED no Longer thinks it's Weighing on the Economy Jerome confirmed that this is The case and said that the FED always Knew it would eventually be removed from Its list of concerns some people are Still living in the past apparently In all seriousness the 14th question Came from a reporter at Marketplace they Asked Jerome if he agrees with lail that A wage price spiral hasn't started
Jerome said that he does agree but Warned that if a wage price spiral was Allowed to begin it would be very Difficult to stop hence all the rate Hikes The 15th question came from a reporter At MarketWatch they again asked Jerome If the Fed is concerned about the easing Of financial conditions noting that fed Officials had singled out the market Rally as an issue in the minutes of Their last meeting Jerome said that Financial conditions are the same This is bizarre because they're very Clearly not most markets have gone up by Double digits since December this makes Me wonder if Jerome was purposely dovish Consider that crashing the markets hard Or raising interest rates a lot more Would mean a deep recession and that's Exactly what the markets want food for Thought Now the final question came from a Reporter at Punchbowl news which is a Mainstream media Outlet I've never heard Of they seem to be good because the Reporter asked Jerome whether the FED is Aware that selling assets from its Balance sheet means the U.S government Could default sooner than June this is Something I mentioned in our video about All the government defaults that we Could be about to see Jerome repeated That it was up to Congress to decide but
Hinted that the market rally is in fact Being caused by extra liquidity from the Treasury which will only stop once the Debt ceiling is raised So this brings me to the big question And that's what the fed's press Conference means for the markets going Forward in case it wasn't clear enough I Think investors have been paying too Much attention to Jerome's dovish Comments and not enough attention to his Hawkish comments that is not good the Fact of the matter is that inflation Still isn't anywhere close to the fed's Two percent Target it's also a fact that The labor market is still strong at Least on paper it's even a fact that Institutions of all kinds still have More than enough stimulus money on hand To cope with higher rates as per Jerome's own admission this means that The FED can and will continue to raise Rates for the foreseeable future that There probably won't be a recession at All and that nothing in the U.S Financial system will break this sounds Unbelievable but like Jerome said we are Dealing with a different kind of Business cycle If you want to understand just how Different the current business cycle is Look no further than the money supply It's been on the decline for the first Time in decades interest rates are also
Higher than they've been in decades Which is incentivizing saving over Spending for the first time in well Decades Nobody knows how this new regime will Affect the markets but one thing is for Sure it's not going to be good for Speculative assets with no fundamentals This means it's not going to be good for Most stocks and it's not going to be Good for most cryptocurrencies either Possibly even some of the largest ones However this all assumes that the Current status of high rates will become The longer term status quo this is very Unlikely because individuals and Institutions have too much debt to Survive high interest rates for long Eventually they will run out of stimulus Reserves and more stimulus will be Needed investors are hyper aware of this Which is why the markets are rallying in Anticipation of the next round of Stimulus what investors are unaware of Is that the next round of stimulus may Not come for months possibly even years It ultimately depends on how long Institutions can survive these high Rates As for individuals they can expect to be Squeezed by inflation and high interest Rates for the foreseeable future I want To say this is by Design because Squeezing people in such a way is how
You acquire all their assets and force Them to become dependent on the Government for their survival but Squeezing people is also how you get a Revolution and that's something the People in power do not want that's why I Think there's only a matter of time Before we start to see more fiscal Stimulus money going directly into bank Accounts of regular people As in 2021 this will cause a massive Rally the catch is that I suspect Governments will wait until their Central Bank digital currencies or cbdcs Are First Complete because cbdcs are Programmable they'll be able to make Sure you only spend your dystopian Digital money on Essentials like bugs Lab-grown meat seed oils and all that Other good stuff before CBD sees the Government will need to roll out their Dystopian digital IDs and you can find Out when they're coming to your country Or region using the link in the Description anyway that's it for today Folks thanks for watching and I'll see You again soon
