The federal reserve's rate cutting cycle Has begun some are saying that this Means assets of all kinds are about to Hit new alltime highs others though are Saying that what comes next is yet Another once in a lifetime event in Other words a 2008 style recession where Assets of all kinds collapse that's why Today we're going to bring you up to Speed on what the FED has been up to Summarize its recent press conference And explain why it could trigger both an Epic rally And a historic crash stay Tuned let's start with a quick recap of How we got here in early 2021 inflation In the US started Rising due to a Combination of supply chain disruptions Caused by pandemic restrictions and a Surge in demand caused by pandemic Stimulus AKA money printing at the end Of 2021 the FED announced it would raise Interest rates now without getting too Deep into the weeds raising interest Rates is supposed to bring inflation Back down this is because raising Interest rates makes it harder to borrow And makes existing debts more expensive And because most of the economy is Basically debt this slows the economy Which brings inflation down the caveat Is that this economic slowdown comes With a so-called lag effect it takes Between 1 and two years for the fed's
Rate hikes to affect the economy the Catch is that the economy and the Markets are two different things markets React to rate hikes right away in fact They often react before rate hikes even Happen this is why the markets peaked in Late 2021 when fed chairman Jerome Powell announced the central bank would Be raising interest rates and it's why The markets crashed in mid 2022 when the FED actually started raising interest Rates investors weren't sure how high Interest rates could go and uncertainty Is the most common cause of Market Crashes remember that for later now here Is where things get interesting in Theory markets should have started Rallying in mid 2023 when the FED Stopped raising interest rates that's Because historically what follows is a Big rate cutting cycle in practice However the markets crashed with many Cryptos hitting new all-time lows this Is because long-term interest rates had Started Rising for context the FED only Influences short-term interest rates and Does this by adjusting the interest rate That Banks use to lend to each other Overnight longer term interest rates are Driven by the markets specifically for US Government debt now without getting Too technical the yield on long-term US Government debt particularly the 10-year Treasury bond determines the interest
Rate on longer term debts in the economy Such as mortgages as a fun fact this is Believed to be because the average Duration of debt in the US economy is Around 10 years fun facts aside the Spike in the 10-year yield at the end of October 2023 was what caused the markets To crash and the subsequent decline in The 10-year yield is what caused the Markets to Rally what's fascinating is That it was the treasury Department that Brought long-term interest rates back Down this was done by issuing shorter Term US Government debt AKA treasury Bills this reduced the number of Long-term Bonds in circulation which Caused their price to rise and yield to Fall the key takeaway here is that the Treasury Department effectively Manipulated long-term interest rates in Late 2023 at the same time the FED Started giving early signals that it Could cut interest rates which sent the Markets on a tear going into 2024 apart From a few hiccups such as the Yen carry Trade unwind in early August markets Have been going up only since the start Of the year and continue to hit new Highs this is simply because inflation Is close to hitting the fed's 2% Target And unemployment isn't too far above the Fed's 4% Target the FED has cut Short-term interest rates for the first Time in four years and the treasury
Department continues doing stuff to keep Long-term rates down and the markets up At first glance then everything looks Fine it looks like the US economy is Chugging along and that markets are Going to keep hitting new highs upon Closer inspection however signs of Recession are starting to show and Historically speaking recessions tend to Happen not long after the FED starts Cutting rates so it's against this Uneasy backdrop that Jerome pal took to The stage at last week's fed press Conference and by the way if you're Enjoying the video so far be sure to Smash that like button and subscribe to The channel and ping that notification Bell so you don't miss the next one hey Man hey what are you do for living me I'm a uh I'm a crypto YouTuber yeah yeah It's pretty pretty fun job actually See and what about you what do you do For a living oh me man I check the coin Bureau deals page it's got sign up Bonuses of up to $100,000 and trading Fee discounts but I mean huge trading Fee discounts and exclusive alquin Alpha In their Subscription Service check it Out Now Jerome began his speech by Highlighting the fact that the FED is Now focused on the employment side of Its dual mandate as I just noted the FED Has a 2% inflation Target and a 4%
Unemployment Target with inflation Falling and unemployment Rising the FED Has pivoted from the former to the Latter Jerome then announced that the FED had decided to reduce interest rates By 50 basis points or 0.5% bringing short-term interest rates Down from around 5.5% to 5% notably he claimed that the FED decided to cut by 50 basis points Because it's confident that employment Will remain strong for reference many Believed that the FED would not cut by 50 basis points because it would send The opposite signal cutting by such a Large amount could suggest that the FED Doesn't think that employment will stay Strong Jerome's comments were an attempt To dismiss this possibility and Jerome Then said another notable thing and That's that the FED will continue to let Its balance sheet run off in plain English the FED will continue selling Assets from its balance sheet the Practical effect of this is that it will Cause long-term bond prices to fall and Long-term interest rates to rise sound Familiar we'll come back to that later Though now Jerome went on to give an Overview of all the key data points Around the economy and inflation as well As where the FED sees them all heading This information is provided in the Fed's summary of economic projections or
Sep a document that it updates at every Other fed meeting if you've looked at The most recent SCP you'll know that There's not much to write home about There the FED expects GDP to stay steady At around 2% in the coming years it Expects unemployment to rise slightly Before falling back to its 4% Target and For inflation to continue falling until It hits its 2% Target the only Prediction worth expanding on is the Fed's projection for its future interest R rates most fed officials see interest Rates falling down to around 3% in the Coming years and staying at those levels In the long term this is significant as It suggests that we are now in a higher Interest rate environment in case you Missed it interest rates had been Practically at zero since 2008 now after His review of the SCP Jerome underscored The fact that the FED is focused on the Unemployment side of its dual mandate However he simultaneously stressed that The FED would continue to look at Incoming inflation and unemployment data When it comes to adjusting interest Rates in the future to be exact Jerome Said that if inflation continues falling Or unemployment continues Rising then The FED quote will respond translation The FED will continue cutting interest Rates bigly if either of these two Happens this could be taken as a sign
That the FED is more concerned about a Recession than it lets on and you can Learn more about whether we're in a Recession and what it could mean for Your portfolio using the link in the Description now once Jerome's speech was Finished the question period began the First reporter to ask questions was from CNBC they asked Jerome a whole load of Questions which can be summed up as will You cut by 0.5% again at the next Meeting Jerome said it depends on the Data but the sep is their base case Since fed members expect interest rates To be at around 4.5% at the end of the Year and given that there are two more Fed meetings left between now and then This implies a 25 basis point cut at Each one but again this will depend on The unemployment and inflation data that Comes out between now and then after a Pointless question from a reporter at The Associated Press a reporter from Reuters asked one of the most important Questions of the bunch was there Consensus among fed officials to cut Rates by 50 basis points for those Unaware one fed official objected the First objection since 2005 Jerome said That most fed members still supported Cuts but there's more to this story as You'll see in a second anyway the fourth Reporter to ask questions came from the New York Times and they asked another
Important one how can the FED be so Confident that unemployment will stay Where it is when historically it has a Habit of going parabolic after Rising This much a subtle reference to the Sam Rule if you watched our video about the Sam rule you'll know that it uses the Rate of change in unemployment to Estimate when the economy is in Recession as most of you will know in Early August the S rule was triggered For the first time since the pandemic Which led to recession fears what's Scary is that Jerome said the labor Market was strong and that inflation was Coming down and then paused before Taking the next question put differently Jerome dodged the question about the Possibility that the unemployment rate Could keep rising and he did so very Unconvincing in ly now the fifth Reporter to ask questions was Nick timos From The Wall Street Journal who's Famous for getting Insider info about The FED Nick's question was one of the Most eye-opening he asked whether the FED would continue selling assets from Its balance sheet even though it was Cutting rates this is eye openening Because Jerome has barely had any Questions about the fed's balance sheet Operations since it began raising rates Many fed analysts such as Danielle de Martino Booth have even argued that it
Was off limits for reporters to ask and That's because it was the most important Factor Jerome's answer was that yes the FED will keep selling assets from its Balance sheet for the foreseeable future This is extremely significant because it Means that long-term interest rates will Continue facing upside pressure even While short-term rates are falling this Inconsistency in policy is unprecedented But again we'll come back to that later Now after a few more pointless questions From reporters at the financial times Bloomberg and the Washington Post a Reporter from axio asked another Pressing question which can be Summarized as what's causing Unemployment to rise Jerome's answer was Surprising and that's a surge in labor This was surprising because Jerome Specified that the surge in labor was Due to record levels of illegal Immigration into the US logically this Has substantially increased the number Of people looking for work and since That's the literal definition of Unemployment unemployment has started Rising what Jerome failed to mention was That the influx of illegal immigration Has reportedly declined in recent months This means that unemployment could Actually start falling again in the not To distant future we'll find out once The next unemployment print comes out on
The 10th of October mark your calendars Anyways a reporter from Fox Business Then asked an even more pressing Question and that was whether the FED Will go back to a zero interest rate Policy AKA Zur Jerome said that he Personally doesn't see interest rates Going back to zero but admitted there Was no way of knowing for sure this ties Into what I mentioned earlier and that's That we could be in an era of higher Interest rates and possibly even one Where interest rates keep going higher This though ultimately depends on Inflation which you'll recall is the Reason why the FED raises and lowers Interest rates if inflation stays high So will rates now the Fox Business Reporter followed up with another spicy Question and that was whether the fed's Decision to cut interest rates by a Sizable 50 basis points was politically Motivated in any way Jerome vehemently Denied this insisting that fed members Are apolitical in their analysis more on That in a sec after yet another round of Pointless questions from reporters at CBS and Bloomberg a reporter from Politico asked a question that pointed Out the elephant in the room if interest Rates rates take up to 2 years to affect The economy how will cutting interest Rates now help the economy in the short Term well the answer is that it doesn't
Cutting interest rates is intended to Juice the markets ahead of one of the Most contentious elections in history But of course that's not what Jerome Said funnily enough he said something Else that was presumably intended to Take the media's attention off of that Question that's because Jerome admitted That the FED probably should have cut Rates in July and that the reason why it Was cutting by 50 basis points now was Because it was behind the curve the Reason why we think this was some kind Of diversion tactic is because Jerome Had refused to answer the question Earlier in any case after even more Pointless questions from an ABC news Reporter a reporter from market watch Pointed to another anomaly from the fed You see the FED never wants to surprise The markets this is why it tends to send Officials out to do interviews that hint At what they will decide this time was Different though and it could be clearly Seen in the Futures markets for how much The FED would cut investors were torn Between 25 basis points and 50 basis Points now some fed analysts have taken This as a sign that fed officials Themselves were unsure of how much they Should cut regardless the market watch Reporter asked if the FED would have cut By 25 basis points if that's what the Markets had been pricing in all Jerome
Said was that the FED would do what's Right for the economy some would Interpret his answer to mean that the FED will always do what's right for the Markets then after a redundant question From a reporter at The Economist a Reporter from CNN asked about the fed's Politicization explaining that Presidential candidate Donald Trump has Hinted that he would like to have more Influence over the FED FYI Jerome and Trump didn't exactly get along when Trump was in office anyway Jerome made It clear that the FED is apolitical but This is Up For Debate consider that most Fed officials donate to the Democratic Party and not only that but a former fed Official actually suggested that the FED Should tank the economy to do damage to Trump's presidency back in 2019 sound Familiar well if it does then you Probably watched our video about how Bond investors could be controlling Politicians by threatening to push Interest rates higher if they don't get What they want believe it or not but JD Vance Trump's VP stated in an interview That this is a future Trump Administration's greatest fear so then This brings me to the big question and That's what the fed's interest rate Decision means for the economy and the Markets again these are two different Things in case you missed it it takes up
To 2 years for rate cuts to affect the Economy so it's safe to to say that fed Cuts won't help much on that front so This begs the question of whether the Economy is on the brink of recession Especially since the FED has a habit of Cutting interest rates just before Recessions start the answer is probably No besides the fact that the FED isn't Cutting rates into a crisis like it has In previous Cycles fiscal policy is Still going strong put differently it's No longer the fed that's doing most of The money printing it's the US Government via the treasury department So long as the US government continues Spending then it will be very hard for The US economy to fall into recession And it's safe to assume this spending Will continue indefinitely this relates To what the fed's interest rate decision Means for the markets as I hinted in the Introduction the answer here is twofold And it depends on the time frame in the Short term rate cuts are likely to boost The markets particularly small cap Stocks as they the most sensitive to Interest rates the same is true for Cryptocurrencies particularly altcoins Which seem to be highly correlated to Small cap stocks this is why crypto has Been rallying hard with altcoins leading The way and why it will continue so long As the FED keeps cutting rates but again
This bullish scenario only applies to The short term in the longer term the Fed's rate Cuts risk reigniting Inflation which in turn risks sending Interest rates higher it's believed this Is the reason why long-term interest Rates started Rising after the FED cut Short-term rates but as we've learned There's another Factor at play here the Fed's steady balance sheet runoff from Our perspective it's possible that the Biggest contributor to long-term Interest rates Rising was the fed's Decision to continue selling assets from Its balance sheet to put things into Perspective the FED holds around $5 Trillion in US Government debt and Around half of it falls into the Long-term bucket by continuing to sell These bonds the FED is knowingly or Unknowingly setting the stage for the Exact kind of bond market volatility the Trump team seems to be terrified of as Some of you may know the bank of England Coincidentally did something similar Before the UK guilt crisis in 2022 the Result was that prime minister Liz truss Was forced to resign when her mini Budget went down like a f to funeral now When you remember most fed officials Donate to Democrats it's not far-fetched To assert that they're setting the stage For a financial crisis to happen under Trump's watch if he's elected the
Frustrating thing is that there's no way Of proving this intent the FED could Just claim it's doing what's required to Achieve its dual mandate that said there Is something of a Smoking Gun and that's The fact that the fed's interest rate Policy has never been inconsistent with Its balance sheet policy this is the First time that one is easing while the Other is tightening fortunately or Unfortunately the Trump campaign is Aware of this looming threat if it Clinches Victory the question then is What if anything Trump could do to stop This potential plot the answer is Probably not much because it would Involve taking control of the FED which Would be truly unprecedented make no Mistake Trump taking control of the FED Would open a Pandora's Box that could Not be closed and yet it's hard to argue That the FED isn't political already it Went and cut rates before an election to Boost the markets whether or not that Was the intention it was the outcome Which brings us back to square one There's no way of proving intent the FED Is just doing its job protecting the Economy do you know what 2025 is going To be Absolutely Wild and that's all for today's video so If you found it informative smash that Like button to let us know if you want
To keep getting this informative content Then subscribe to the channel and ping That notification Bell and if you want To help inform others about the fed's Decision then share this video with them As always thank you for watching and I'll see you in the next one this is Guy Signing off
