Intro
What the Federal Reserve says and does
can move the markets and it's typically
very careful about what it says and does
as a result sometimes however the
markets react even when the fed's words
and actions are carefully crafted this
was the case with the fed's latest press
conference where chairman Jerome Powell
caused the markets to crash what's
strange is that the things he said
should have caused the markets to Rally
that's why today we're going to bring
you up to speed on what the FED has been
up to summarize its press conference and
explain what it could mean for the
markets.
Fed Recap
Let's start with a quick recap the FED has been raising interest rates since
last spring to fight inflation this
initially caused the markets to crash
that's ultimately because there was
uncertainty about how high inflation
would go and how much the FED would have
to raise interest rates to fight this Inflation
as the months went on however it became
clear that inflation was coming down and
that the Fed was nearing the end of its
interest rate Rampage and so the Markets
started to Rally because investors could
see that the next step was for the FED
to lower interest rates reigniting the
credit driven economy of course for a
while investors were concerned that the
fed's rate hikes would cause a recession
but these concerns paradoxically
resulted in even more Market rallies
that's simply because the fed's solution
to recessions has been to lower interest
rates and start stimulating rocket fuel for markets
this is the hard Landing scenario you've
been hearing about then investors
started realizing that the U.S economy
was more resilient than anyone had
imagined in large part due to government
spending naturally this also resulted in
even more Market rallies because a
strong economy plus declining inflation
meant that the fundamentals of the
economy would improve this is the soft
Landing scenario you've been hearing
about over the last few weeks however
something changed you see the fed and
other central banks only control
short-term interest rates specifically
the interest rates that Banks use when
they lend money to each other overnight
by contrast long-term interest rates are
determined primarily by the free market
long-term interest rates in the U.S are
determined by the supply and demand for
long-term U.S government debt AKA bonds
when there's lots of bonds selling
long-term rates rise and when there's
lots of bond buying long-term rates full
as you may have heard long-term rates
have been rising fast logically then
this means that someone somewhere is
selling lots of U.S bonds for some reason
if you watched our video about the debt
ceiling deal you'll know that the U.S
treasury Department is one of these
sellers it's been selling U.S bonds to
refill its bank account at the FED but
it's not the only one selling if you
watched our video about China's new
Central Bank Governor you'll know that
the People's Bank of China has also been
a big seller it's been selling U.S bonds
for US dollars to buy the Chinese Yuan
to prevent its value from falling
further the bank of Japan has been doing
the same thing for the yen
and if you've been keeping up with our
coverage of the fed's press conferences
you'll know that it has also been
reducing its balance sheet which
consists primarily of U.S bonds it's
been shrinking its U.S Bond Holdings as
part of its monetary policy something
that's gone almost unnoticed until now
as with the rise in short-term interest
rates last year the recent rise in
long-term interest rates seems to have
taken the markets by surprise and is
creating a lot of uncertainty among
investors as you'll soon see long-term
interest rates could continue to rise
and this could continue to pull the
markets down it was against this backdrop.
Jerome’s Speech
That fed chairman Jerome Powell
took the podium at the fed's most recent
press conference now this press
conference was particularly significant
because it was accompanied by the
release of the fed's latest summary of
economic projections or SCP an updated
roadmap if you will
Jerome started by saying the same thing
he said since the start of last year the
FED is committed to Bringing inflation
back down to two percent he announced
that the FED had decided to leave its
interest rate of 5.25 to 5.5 percent
unchanged for now but has also decided
to continue shrinking its balance sheet
Jerome said that the FED will proceed
carefully when raising interest rates
and will make this decision based on
incoming data about inflation and the
economy in Practical terms this means
the core CPI and the pce for inflation
and various employment statistics for
the economy this is something Jerome has
said at recent meetings but this time he
included something different in addition
to watching data about inflation and the
economy the FED will also be watching
unspecified risks not lingering on this
point for too long Jerome then pivoted
to talking about the fed's latest SCP he
noted that fed members foresee the
economy being even more resilient than
they had initially projected he
explained that this is due to the recent
GDP figures which came in higher than
expected FYI this is significant because
it implies that most fed members believe
there won't be a recession
and it's a similar story when it comes
to unemployment Jerome acknowledged that
the unemployment rate recently spiked to
3.8 percent but pointed out that the FED
Project's unemployment will only rise to
4.1 percent as with the fed's economic
forecast the fed's employment forecast
suggests they don't see a recession note
that this was in stark contrast to
Jerome's tone during his speech which
was abnormally cautious and even
downright hesitant at some points things
got even more interesting when Jerome
started talking about inflation figures
he didn't highlight the recent CPI print
as much as you might expect now this was
surprising given that the CPI for August
had come in above expectations in past
press conferences Jerome would have
underscored this fact instead he focused
on the fact that fed officials expect
inflation as measured by the pce to come
down to two percent over the next two
years this not only implies that there
will be no recession but that there will
be a soft Landing inflation will come
down with no recession
recall this is supposed to be bullish
defense projections for interest rates
should also have been bullish Jerome
noted that most fed officials believe
one more rate hike of 25 basis points
0.25 percent is appropriate between now
and the end of the year and then quickly
noted that the Fed foresees rate Cuts
sometime next year again this is
supposed to be bullish yet the markets
crashed as Jerome spoke not only that
but Jerome took an uncomfortably long
pause when discussing the rate Cuts
probably nothing
Jerome stressed that these projections
assume that the economy will evolve as
expected meaning the GDP figures and the
unemployment figures until then though
the FED will continue to quote
significantly reduce the size of its
balance sheet and raise interest rates.
CPI, SEP, GDP
If need be now once Jerome finished his
speech the question period began the
first reporter to ask questions was from
the financial times they asked Jerome
why fed officials think one more hike is
appropriate Jerome said that it's all
because of the economic data rates may
not be restrictive enough just yet the
reporter Then followed up with a second
question and that's why the Fed
foresee's rate Cuts in 2024. Jerome was
visibly uncomfortable and responded by
insisting that the SCP is not a concrete
roadmap he then added that it reflects a
stronger than expected economy which
doesn't make much sense now the second
reporter to ask questions was from The
Washington Post they asked Jerome
whether there was an argument about
raising rates one more time Jerome said
there was no argument they were just
merely discussing the data we'll find
out when the FED minutes come out in a
couple of weeks time
Jerome also added that the recent
inflation data was looking promising
this was an eye-opening comment given
that aforementioned August CPI which
came in higher than expected
from our perspective this comment
suggests the FED doesn't think inflation
is beginning a new trend higher make no
mistake this could very well be the case
and will know when the September CPI
comes out in mid-october mark your
calendars next the third reporter to ask
questions came from CNBC
they asked Jerome whether the FED
believes inflation will be more
persistent and whether this means that
the default interest rate will be higher
as a result
Jerome completely dodged the question by
saying he doesn't know nor does the Fed
the fourth questioner was from Reuters
they asked Jerome why it is that he
keeps saying that bringing inflation
back down to two percent will require
below Trend growth AKA recession while
the FED is not forecasting a recession
Jerome just said that the FED is
following the economic trend
the Reuters reporter followed up with a
cutting question and that's whether this
means the soft Landing scenario is still
on the table incredibly Jerome said no a
flat out no
he explained that a path to a soft
Landing could still exist but it will be
determined by factors that are outside
of the fed's control this begs the
question of which factors the FED is
talking about our best guess is that the
answer is the treasury departments or
rather the U.S government's spending
remember that government spending seems
to be the reason why there's been higher
than expected economic activity on that
note many of the government spending
programs that were supporting the
economy have come to an end or will soon
be coming to an end the two elephants in
the room are the employee retention
credit which just ended and the Deferred
student loan repayments which start next
week
then the fifth reported to ask questions
was Nick timuros of the Wall Street
Journal now Nick is really the only fed
reporter you need to know by name his
nickname is the Fed Whisperer but this
time it was Jerome who did the
whispering Nick asked Jerome about
inflation and interest rates in their
exchange it became clear that Jerome has
shifted his Focus from inflation to the
economy now this makes sense given the
changing fiscal situation a few moments
ago the thing is that Jerome's sudden
economic caution should have been yet
another bullish indicator for the
markets but it wasn't.
Recession, Inflation
The sixth reporter to ask questions was from the New York Times They asked
Jerome about the rate cuts the FED is
projecting for early next year Jerome
repeated that the fed's SCP should not
be taken as a road map but confirmed
that yes rate cuts are coming and yet
the markets continued to crash
the seventh reporter to ask questions
was from axios they asked Jerome what's
causing the Apparently strong economic
growth Jerome said that it appears to be
consumer spending this makes sense and
it's especially relevant to stuff like
the student loan repayments spending
will fall
the eighth reporter to quiz Jerome was
from Politico they asked him a de facto
follow-up to the previous question and
that's how factors like student loan
repayments will affect the FED Jerome
revealed that the FED is watching these
factors very closely including the
recent increase in oil prices speaking
of which you should know that if oil
prices stay too high for too long this
will start feeding into the inflation
measures the FED is watching.
If this
happens the FED will basically be forced
to raise rates for PR purposes consider
that oil prices rallied like crazy
during the 2008 recession probably
nothing anyways the ninth reporter to
ask questions was from Bloomberg lo and
behold they asked Jerome about a
potential recession jerem suddenly
morphed into a hawk and said that quote
the worst thing we could do is fail to
restore price stability in other words
inflation is more important it's safe to
say that he didn't fully believe what he
was saying
next up was a reporter from the
Associated Press they asked Jerome
what's causing inflation to come down
Jerome said that it's a combination of
Supply chains improving after the
pandemic disruptions and a gradual
pullback of fiscal policy AKA government
spending
the 11th reporter to ask questions was
from Bloomberg TV they asked Jerome why
the FED didn't hike during this meeting
if most of its members are projecting
one more hike Jerome said it's because
they've been moving fast and now they
need to be careful put differently
they're a bit scared the 12th reporter
was from Yahoo finance they asked Jerome
whether the FED is accounting for base
effects and how the government shutdown
would impact the Central Bank regarding
the base effects Jerome said yes they
take them into account hence the lack of
CPI concern regarding the government
shutdown Jerome said that it could mean
the FED won't get the data it needs to
make its interest rate decisions
newsflash that is bad because it means
uncertainty and uncertainty means
volatility this was easily the most
important answer Jerome gave at this
press conference by the way
the 13th reporter to ask questions was
from Fox Business they asked Jerome
whether Rising oil prices are a problem
for the FED what's fascinating is that
Jerome first said that Rising oil prices
will affect consumer confidence and
consumer spending by extension then he
mentioned the inflation part this is
fascinating because it's further
evidence to the idea that Jerome is now
more concerned about employment than
inflation as most of you will know
managing both is the fed's Mandate the
fact that Jerome starts on the economy
is apparently at odds with those of his
peers is even more fascinating
the 14th reporter with questions was from market news
Financial Crisis, Long Term Rates
They addressed the
elephant in the room
they asked Jerome why long-term interest
rates are rising if you were paying
attention earlier you know the answer
from Jerome's perspective it's mainly
because of bond issuance by the treasury
then the 15th reporter was from American
Banker instead of asking about the banks
which aren't doing so well by the way
they asked about the housing market
Jerome rambled a bit and then said quote
in a financial crisis you have to do
what you can to support the economy if
that's not a red flag.
I don't know what
is anyhow the 15th reporter was from
Marketplace and they asked Jerome
whether a decline in consumer confidence
would help the FED bring inflation back
down to two percent Jerome said
something to the effect of well I
wouldn't put it that way meaning yes yes
it would
the marketplace reporter Then followed
up with a similar question and that's
whether a decline in consumer confidence
would cause a recession again Jerome
said something to the effect of well
that's always a concern which again
means yes yes it would
the 16th reporter to ask questions was
from The Economist and they asked Jerome
whether interest rates are effective
after beating around the bush Jerome
finished by saying that interest rates
might just have to go higher by now
you'll know the reporter should have
specified the duration of those interest
rates anyway the final reporter to grill
the big dog was from MarketWatch and
they asked Jerome whether the FED will
start doing surveys to see how
low-income households are doing Jerome
said no even while he confirmed that the
fed's recent Outreach found that
low-income households are struggling.
What Does It Mean For The Markets?
I guess they just don't care any who this brings me to the big question and that's what all this means for the markets
well the answer depends on another more
important question and that's why Jerome
suddenly seems to be expecting a
recession while everyone else isn't and
why the Market's reaction to his speech
was all backwards
some would argue that Jerome's sudden
expectations of recession could be the
reason why markets crashed but if that
was the case then long-term interest
rates would probably have come down as
investors started to buy bonds for
safety however the opposite happened
long-term rates rallied in case it
wasn't clear enough the markets don't
like high interest rates as such it's
probably the rise in long-term rates
that cause the markets to crash some
would argue that it was actually the
rise in the US dollar.
But Jerome's
comments about rate Cuts should have
actually caused the dollar to weaken, no
matter how you slice it it doesn't make
sense either recession is coming then
Bond deals should be falling if the
economy will stay strong then markets
should be rallying and the US dollar
should be falling and it should be
falling a lot because this was literally
the first time Jerome talked rate cuts
when you combine this with the fact that
Jerome seems to be extremely concerned
about the economy it suggests that
there's a much bigger game being played
here it's almost as if Jerome knows
something that very few others do
something that's causing him to lose his
cool which he rarely ever does now we
can't say for sure but we suspect this
has something to do with the fed's
fiscal counterpart the treasury
Department if you've watched any of our
videos about entities like the financial
stability oversight Council or fsoc
you'll know that they always include the
heads of the fed and the treasury given
all the bonds the treasury has been
selling lately it's safe to to assume
that Jerome has been meeting with Janet
Yellen and the heads of other government
agencies to ensure these massive sales
are going smoothly Janet herself has
confirmed that the treasury is working
with Wall Street to this end now to the
public.
This Bond issuance is to increase
the U.S government's cash pile at the
FED behind closed doors however this
Bond issuance could have another purpose
and that's to squeeze the geopolitical
opponents of the United States for
context most governments and
corporations have lots of US dollar
debts when long-term interest rates rise
these U.S dollar debts become more
expensive this means that these
governments and corporations must find
additional US dollars depending on which
government or Corporation we're talking
about the only way to find more US
dollars is to sell other assets selling
other assets for the US dollar would
cause the US dollar to rise and this
would explain why the US dollar Rose
even while Jerome talked about rate Cuts
but that's just half of the story
if the treasury really is trying to
inflict pain on the US's enemies by
raising rates this will affect the
domestic economy too chances are that
this is what Jerome is seeing and it
would explain why nobody else at the FED
can see it only Jerome is privy to this
information only he can truly understand
just how high the treasury is prepared
to raise long-term interest rates to
ensure that the US dollar and its
country of origin remain dominant
can the U.S afford to do this though
given the massive amounts of debt its
own government owes well common sense
says no but we're not dealing with a
normal Financial system.
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