URGENT: Rate Cuts Are Coming! Not What You Think

Summary

In this video, the speaker discusses the Federal Reserve's upcoming rate cut decision on September 18th, highlighting the uncertainty between a 25 or 50 basis point cut. They note the market's jitters due to differing opinions among economists and within the Fed itself. The speaker also analyzes recent employment data, suggesting a potential recession, and references the 'S rule' recession indicator. They conclude with their prediction of a 50 basis point rate cut, influenced by Jerome Powell's past statements and the softening labor market, and discuss potential market reactions and their own investment strategies.

Takeaways

• 📅 The Fed is scheduled to make a crucial interest rate decision on September 18th, a date that historically marked the start of rate cuts in 2007.
• 😟 There is significant uncertainty and debate among economists and within the Fed itself about whether to implement a 25 or 50 basis point rate cut.
• 📉 Market jitters are already apparent due to the divergence in opinions on the appropriate course of action for the Fed.
• 🔍 The expectation for a 50 basis point rate cut has recently increased, with fed funds futures indicating a nearly 60% chance of this outcome.
• 📈 Employment data, including JOLTS job openings and ADP non-farm employment change, has come in lower than expected, influencing the rate cut expectations.
• 📊 The 'S' rule recession indicator, based on the 3-month average unemployment rate, suggests a potential recession if the rate rises by more than 0.5% from its low point in the previous 12 months.
• 🚿 The lagging effect of Fed policy is highlighted, where the impact of rate changes on the economy and unemployment is not immediate but becomes evident over time.
• 📉 Recessions in the U.S. are typically identified retrospectively, meaning a recession may be underway without immediate official acknowledgment.
• 📈 Despite potential recession risks, the speaker anticipates an initial market rally following a rate cut, possibly reaching all-time highs, influenced by historical market reactions.
• 💼 The speaker shares a personal opinion that the Fed will likely cut rates by 50 basis points, influenced by Jerome Powell's past statements and recent labor market data.

Q & A

What is the significance of the date September 18th in relation to the Fed's rate cut history?

September 18th is significant because it's the same date when the Fed cut rates after the hiking cycle of 2007, marking the first rate cut on that day. However, the conditions now are not the same as they were in 2007.

What are the two potential outcomes for the Fed's rate cut decision on September 18th?

The two potential outcomes are a 25 basis point rate cut or a 50 basis point rate cut, with the latter signaling that the Fed might be more concerned about the economic situation than it is publicly communicating.

What has caused the recent shift in expectations for a 50 basis point rate cut by the Fed?

The recent shift in expectations for a 50 basis point rate cut is due to weaker-than-expected employment data, including lower job openings, ADP non-farm employment change, and higher unemployment claims.

What is the 'S rule' recession indicator mentioned in the script, and how does it relate to current unemployment rates?

The 'S rule' recession indicator predicts a recession based on a 3-month average increase in unemployment rates of more than 0.5 percentage points from its low point in the prior 12 months. Currently, the 3-month average is at 0.57, suggesting a potential upcoming recession.

How does the lagging effect of Fed policy impact the economy and unemployment?

The lagging effect of Fed policy means that when the Fed increases interest rates, the immediate impact on the economy and unemployment is not significant. However, over time, the effects accumulate and can lead to a wave of unemployment data, which might cause a recession even as the Fed starts cutting rates.

Why are recessions in the United States usually called after the fact?

In the United States, recessions are typically declared after they have occurred, as economic data needs to be analyzed and confirmed. This means that a recession might be announced months after it has started, as was the case with the 2007 recession which was declared in December 2008.

What is the difference between a recession and a Black Swan event according to the script?

A recession is a technical economic downturn that can be shallow and not necessarily tied to a catastrophic event like a Black Swan, which implies an extremely rare and severe market event. The script clarifies that a recession does not always equate to a worst-case scenario.

What was the 'Black Swan' event in 2023 mentioned in the script, and how was it averted?

The 'Black Swan' event in 2023 was the bank failures in March. It was averted by the Fed and the Treasury stepping in, printing more money and backstopping the banks, preventing a potential deep recession.

What is the speaker's opinion on the Fed's rate cut decision on September 18th?

The speaker's opinion is that the Fed will likely cut rates by 50 basis points on September 18th, based on Jerome Powell's previous statements and the recent softening labor market data.

How does the speaker expect the market to react to the Fed's rate cut decision?

The speaker expects that there will be initial enthusiasm and possibly a rally in the market following the rate cut, potentially reaching or nearing all-time highs, especially if the cut is 50 basis points.