OMG!! The Fed Just Made A HUGE Mistake

Summary

In this video, the speaker critiques the Federal Reserve's recent decision to lower interest rates by 50 basis points, arguing that a more aggressive cut was necessary. By analyzing past economic cycles, inverted yield curves, and unemployment trends, the speaker suggests that the current rate cuts are insufficient for preventing recessionary risks. They dispute the narrative that gradual cuts will suffice, warning that the economy is likely to experience sharper fluctuations. The speaker also addresses concerns about inflation, emphasizing the need for larger rate reductions to avoid deeper economic issues.

Takeaways

• 📉 The Federal Reserve recently reduced interest rates by 50 basis points, which the speaker considers a significant error.
• 📊 Historical rate hikes by the Fed have typically been followed by rate cuts, similar to the recent 50 basis point reduction.
• 📈 The speaker challenges the Fed's narrative of a slow and steady rate reduction, suggesting a more abrupt change based on past cycles.
• 🔍 The yield curve has been inverted for the past two years, indicating potential underlying economic issues.
• 📉 Each time the yield curve has inverted historically, it has preceded economic downturns like the GFC and the dotcom bust.
• 📈 The Phillips curve suggests a relationship between unemployment and inflation; however, the speaker argues that the current rise in unemployment rates contradicts this theory.
• 📊 The speaker points out that the Fed's rate cuts have historically been lower than the 2-year Treasury yields, indicating the Fed might be behind the curve.
• 📈 The speaker argues that inflation, as measured by CPI, is not as high as it was before previous recessions, suggesting there's room for rate cuts.
• 🏦 The speaker suggests that the Fed should have cut rates by more than 50 basis points, contrary to the mainstream narrative.
• 💼 The speaker emphasizes the importance of listening to market signals, particularly the 2-year Treasury yield, over personal opinions or predictions.

Q & A

Why does the speaker think the 50 basis point rate cut by the Federal Reserve was a mistake?

The speaker believes the 50 basis point rate cut was a mistake because the Fed is responding too slowly to the economic conditions. They argue that the Fed should have cut by at least 75 basis points or more, as the current economic signals suggest a more aggressive rate cut is necessary.

How does the speaker use historical rate cycles to support their argument?

The speaker refers to past rate cycles going back to 1995 and points out that rate cuts are usually followed by deeper recessions when the yield curve is inverted and unemployment rates rise. They argue that the current economic signals (such as the inverted yield curve and the Som rule) indicate we are headed for a similar downturn, necessitating more aggressive rate cuts.

What is the yield curve inversion, and why is it important in this analysis?

A yield curve inversion occurs when short-term interest rates are higher than long-term interest rates, which is seen as a warning sign for an impending recession. The speaker emphasizes that the yield curve has been inverted for two years, which historically signals underlying economic problems and is a major reason they believe the Fed should be cutting rates more aggressively.

What is the Som rule, and how does it relate to the current economic situation?

The Som rule is a metric that looks at the 3-month moving average of the unemployment rate relative to its lowest point in the last 12 months. When the Som rule rises above 50 basis points, it has historically indicated a recession or an imminent one. The speaker notes that the Som rule is currently at 57 basis points, reinforcing their argument that a recession is likely.

How does the speaker address concerns about inflation reaccelerating if the Fed cuts rates more aggressively?

The speaker acknowledges concerns that a 75 basis point cut could lead to reacceleration of inflation but counters this by pointing out that in past recessions, like during the GFC and dot-com bust, inflation did not rise significantly despite aggressive rate cuts. They argue that inflation risks are overstated in this context.

What comparisons does the speaker make between current unemployment rates and those from past recessions?

The speaker highlights that the current unemployment rate is 4.2%, which is comparable to or lower than unemployment rates at the start of previous recessions, such as the GFC and the dot-com bust. This suggests that despite low unemployment, the economy may still be headed for a downturn.

Why does the speaker believe GDP growth is not a reliable indicator that the economy is healthy?

The speaker points out that GDP growth was positive right before the GFC and the dot-com bust, despite the economy being in a vulnerable state. They argue that positive GDP growth, as seen today, does not necessarily mean the economy is healthy or that a recession can be avoided.

How does the speaker use the two-year Treasury yield to support their argument about the Fed’s rate cuts?

The speaker notes that the Fed typically follows the two-year Treasury yield, which has already dropped to 3.6%, while the Fed's rate is still at 4.75%. This suggests the market expects rates to fall further, reinforcing the argument that the Fed is behind and should cut rates more aggressively.

What historical example does the speaker use to address fears of 1970s-style inflation if rates are cut too much?

The speaker acknowledges concerns about repeating the 1970s inflationary spiral but argues that today's situation is different because we do not see the same prolonged increase in the money supply. They point out that inflation only reaccelerated in the 1970s when money supply kept increasing, which is not the case today.

What conclusion does the speaker draw about the Fed’s current interest rate policy?

The speaker concludes that the Fed is making a mistake by not cutting rates more aggressively, as the economic data (such as the yield curve inversion, Som rule, and two-year Treasury yield) indicate that the economy is heading toward a recession. They argue that a deeper rate cut would help mitigate the upcoming economic downturn.

Outlines

00:00

📉 Fed's Big Rate Cut: A Mistake?

The Federal Reserve recently cut interest rates by 50 basis points, surprising many who expected a smaller 25-point cut. The video analyzes historical rate-cutting cycles, emphasizing that such cuts are often followed by slower, steadier cuts. The mainstream narrative suggests that the current cut is part of a gradual process, but the video challenges this, arguing that the economy may be in worse shape than it appears, as evidenced by the inverted yield curve and other troubling economic indicators.

05:00

📊 Unemployment Rate and Economic Warning Signs

The second paragraph delves into the Som rule, which indicates that when the unemployment rate rises above 50 basis points, a recession is either present or imminent. Historically, this rule has held true during significant economic downturns, such as the Global Financial Crisis and the dot-com bust. The video argues that the current economic conditions closely resemble these past recessions, rather than the stable mid-90s, meaning the Fed's gradual rate-cutting strategy is likely misguided.

10:03

🏞️ Low Unemployment, High Risk of Recession

This section counters the argument that the economy is too strong for a significant rate cut, citing low unemployment rates during past recessions. The video highlights historical cases where recessions began with unemployment rates at or below current levels. It challenges the belief that today's low unemployment rate signals economic strength, emphasizing the similarities between current conditions and previous recessions like the Global Financial Crisis and dot-com bust.

15:04

📉 Fed Following the 2-Year Treasury: A Misstep?

The video explains how the Fed historically follows the 2-year Treasury yield when adjusting interest rates. Despite recent cuts, the Fed's rate is still much higher than the 2-year yield, suggesting they're behind the curve. The video predicts that even if the Fed starts cutting rates more aggressively, the 2-year yield will continue to drop, implying that the Fed is out of sync with the market and may need to cut even further.

20:04

📉 Money Supply, Inflation, and Consumer Prices

The final paragraph explores the relationship between money supply and inflation, drawing comparisons to the 1970s. The video suggests that despite concerns about inflation, recent data shows a drop in money supply, which reduces the likelihood of runaway inflation. Instead, the focus should be on the Fed cutting rates more aggressively to prevent an economic downturn. The argument concludes that inflation fears are overblown and the Fed's current policy is too tight.

Keywords

💡Federal Reserve

The Federal Reserve, often referred to as 'the Fed,' is the central banking system of the United States. It plays a crucial role in implementing monetary policy by adjusting interest rates to manage inflation and stabilize the economy. In the video, the Fed's recent decision to drop interest rates by 50 basis points is a focal point of discussion, with the speaker arguing that this action might have been a mistake.

💡Interest Rates

Interest rates are the cost of borrowing money and the return on saving money. They are a key tool used by central banks like the Federal Reserve to influence economic activity. In the script, the speaker discusses past cycles of rate hikes and cuts, using them as a basis for evaluating the Fed's recent decision to lower rates.

💡Yield Curve

The yield curve is a graphical representation of the interest rates on debt for a range of maturities. It is used to predict economic conditions. When the yield curve inverts, with short-term rates higher than long-term rates, it is often seen as a warning sign of a potential economic downturn. The video script discusses the inversion of the yield curve as an indicator of economic stress.

💡Recession

A recession is a significant decline in economic activity lasting longer than a few months. It is typically identified by a fall in GDP, rising unemployment, and a decline in retail sales. The script uses historical recessions to illustrate patterns that might be repeating, particularly in relation to the yield curve and unemployment rate.

💡Unemployment Rate

The unemployment rate is the percentage of the total labor force that is jobless and seeking employment. It is a key economic indicator. In the video, the speaker references the 'Som rule,' which is triggered when the unemployment rate rises significantly, often signaling an economic downturn or recession.

💡Inflation

Inflation is the rate at which the general level of prices for goods and services is rising, and subsequently, purchasing power is falling. The Consumer Price Index (CPI) is often used to measure inflation. The script discusses concerns that lowering interest rates could lead to higher inflation, a situation that was prevalent in the 1970s.

💡Monetary Policy

Monetary policy refers to the actions of a central bank, such as the Federal Reserve, intended to influence the economy. This includes controlling interest rates and the money supply. The video discusses the Fed's monetary policy decisions, particularly the recent rate cut, and how they align with historical patterns.

💡Basis Points

A basis point is a unit of measure used in finance to describe the percentage change in the value or rate of a financial instrument. One basis point is equal to 0.01% or 1/100th of a percent. The video script mentions a 50 basis point rate cut, which is a significant move in monetary policy.

💡M2 Money Supply

M2 is a measure of a country's money supply that includes cash, savings, and time deposits. It is an indicator of the total amount of money in circulation. The script discusses the increase in M2 money supply and its historical correlation with inflation.

💡Phillips Curve

The Phillips curve is an economic concept that suggests an inverse relationship between inflation and unemployment. The video script questions this relationship by pointing out that historically, periods of high inflation have not coincided with high unemployment rates, as the Phillips curve might predict.

💡Marketplace

The marketplace, in an economic context, refers to the arena where buyers and sellers interact. In the video, the speaker suggests that the Federal Reserve should pay attention to the 'marketplace,' specifically the 2-year treasury yield, as an indicator of where interest rates should be set.

Highlights

The Federal Reserve has dropped interest rates by 50 basis points, which is considered a significant move.

Past cycles from 1995 to present are analyzed to understand rate hikes and subsequent cuts.

Rate hikes are usually followed by rate cuts, contrary to market expectations of a 25 basis point cut.

The Federal Reserve's narrative suggests a slow and steady rate cut over the next year.

The yield curve has been massively inverted for the past two years, indicating underlying economic issues.

The yield curve inversion has preceded past recessions, suggesting a similar outcome.

The Phillips curve suggests a relationship between unemployment rate and inflation, which is currently being tested.

The Sum rule has been triggered, indicating a high probability of a recession or proximity to one.

The unemployment rate is currently at 4.2%, which is historically low but has been lower at the start of recessions.

Headline CPI is currently at 2.5%, which is lower than the rate before past recessions.

The Fed's rate cuts are compared to the unemployment rate and inflation data from previous recessions.

The argument that the Fed should have cut rates by 75 basis points or more is presented.

The 2-year treasury yield is used as a market indicator for Fed's rate decisions.

The spread between the 2-year Treasury and Fed funds is at an all-time extreme, suggesting the Fed is behind the curve.

Gold price increases are not necessarily indicative of the Fed dropping rates too soon.

M2 money supply increases historically led to inflation, but the pattern was different in the 1970s.

The velocity of money supply is unlikely to increase significantly if a recession is approaching.

The conclusion emphasizes the high probability of the Fed cutting rates more significantly based on historical patterns.

Transcripts

the Federal Reserve just dropped

interest rates by a whopping 50 basis

points and I think this was a huge

mistake I'm going to explain why in

three simple fast step step number one

let's go over past Cycles we start by

looking at a chart going all the way

back to 1995 to today's date this is fed

funds as you guys probably figured out

on the left we go from 0% up to 7% now

what I want to focus on initially are

these red arrows see these are the times

in the recent past when the FED has

hiked rates we'll call it a rate hiking

cycle and as you would imagine the rate

hikes are usually followed by rate cuts

which is what we saw yesterday when many

Market participants were only expecting

a 25 basis point cut and we actually got

a 50 basis point cut so what we have to

do first and foremost is ask ourselves

in the past when have these rate cutting

time frames been nice slow and steady

because right now if you listen to the

mainstream Media or a lot of quote

unquote experts or the Federal Reserve

themselves they'll sit there and tell

you yeah we did this 50 basis point hike

but uh you know nothing to see here

we'll just sweep that one under the rug

pay no attention to this 50 basis point

and why did we do 50 instead of

25 well it's because the economy is is

is really really strong and we just want

it to stay strong so in the future

what's going to happen over the next

year or so we are going to cut rates but

it's going to be slow it's going to be

gradual so if you extend this out until

the next year it's not going to look

like Wet n Wild like

these like a water park slide like these

others oh no no no it's going to be nice

and gradual so it's going to be maybe

right around here and we're just going

to take our time it's going to look a

lot like the rate hiking cycle that we

saw in the mid

1990s this is the narrative they are

trying to get you to

believe but now let's add a few more

layers of data so we go back and look at

this chart all the ups and all the downs

and we have to ask ourselves okay at

what point in

time was the yield curve

inverted you guys know well from

watching my videos that the yield curve

has been massively inverted for the past

2 years that's when short-term interest

rates are much higher than long-term

interest rates as you would imagine this

is very unusual this is atypical it's

unnatural and it tells us there's a

problem with the underlying economy in

other words when you look at the surface

everything seems fine and dandy but once

you get into the details once you look

underneath the hood you see that there

are a lot of economic storm clouds

Brewing so the yield curve definitely

inverted here we know that for sure did

it invert prior to the surveys of

sickness that would be a yes did it

invert prior to the

GFC oh yeah did it invert prior to the

dotcom bust you better believe it did it

invert during the mid 90s

when we didn't have a recession that

followed these interest rate

hikes that would be no we did not have

an inversion of the yield curve but now

let's ask another very important

question what about the unemployment

rate you guys know from watching my

videos the Som rule recently has been

triggered and all this is is a 3-month

moving average of the unemployment rate

relative to the lowest unemployment rate

over the past 12 months and every single

time going back to the 1950s when you

have seen the P rule go above 50 basis

points we have either been in a

recession or very close to a recession

so this is extremely powerful especially

when you combine it with the inversion

of the curve so as we know the psle rule

has also been triggered in fact it's not

at 50 basis points it's at 57 basis

points right now so we have to go

through the exact same process we went

through right here was the Som rule

triggered during the seresa sickness

recession yes it was GFC

Bingo com bust you guessed it how about

the

1995 increase in interest rates nope

the P rule was not triggered so back

here when we had this Fed rate hiking

cycle that did not result in a recession

it's hard to use this as an example of

what the FED is doing now or what we

should expect moving into the

future because the punchline here is we

didn't have an inverted curve we didn't

have the unemployment rate R spiking and

when you look at these two key key

metrics we see this time is likely again

no certainties only probabilities but

the probabilities are extremely high

that this cycle is going to play out

more similar to this cycle this cycle

and this cycle than what we saw in the

mid

1990s meaning we're not going to have

slow and steady like the mainstream

media and the fed and the experts are

trying to get you to believe we're going

to have Wet n

Wild and I think the huge mistake is not

the fact that they dropped 50 basis

points instead of 25 basis points I

think the huge mistake is that they

didn't drop

75 basis points or

more step number two now I know a lot of

you right about now are saying George

have you completely lost your mind 75

basis points are you crazy don't you

understand that the unemployment rate

yeah sure we've triggered the Som rule

but it's still low it's still at

4.2% and remember we've got CPI we've

had inflation problems hello and If the

Fed cuts by 75 basis points or more

we're gonna have this

reacceleration in inflation because

they've cut too much and the economy

will overheat for heaven sakes and I get

it I get it I get it that's a fair

argument I know a lot of people get

passionate about this stuff but let's

look at the data just like we did in

Step number one first and foremost let's

start with the argument that yeah George

we've seen unemployment Spike but

historically it's very very low which

would

indicate the economy is doing great

we've got nothing to worry about for

heaven's

sakes especially not enough to worry

about that would warrant a 75 basis

point cut all right let's look at a

chart of the unemployment rate and let's

remember that right now we are at

4.2% so let's just try to figure out

where we were prior to the surve of

sickness and that would be

3.6 but let's go back to the

GFC and there you go you see the

beginning of the recession right here

when the Fed was really dropping rates

we're at

4.7 not at 4.2 George

hello

okay fair enough now let's go back to

the dot

bust and you see that right when we

started the recession

we were at

4.2% exactly where we are today but

let's not stop there let's also go back

to

1969 we see at the start of that

recession unemployment rate at

3.5% let's go back

to

1957

4.2% in fact part of 1953

recession we were at

2.6% and then we go back even

further to

1948 and we were at

3.7 in other words there's probably just

as many recessions if not more where the

unemployment rate actually started near

or less than where it is today but now

let's go ahead and look at headline CPI

because the argument there is that the

fed has dropped way too much so we're

going to ignite the inflation and we're

going to go right back to the

1970s we should never ever ever be

cutting rates by 50 basis points heaven

forbid 75 when we've got the headline

CPI at

2.5% well let's just start by going back

to the GFC and prior to the global

financial crisis which definitely

resulted in a recession in fact the

largest recession we have seen since the

1930s when in 2009 we actually had

deflation deflation with a d where

prices actually went down not to mention

the massive asset deflation where the

housing market and the stock market over

time the span went down by

50% and we see going into this

catastrophe the inflation

rate was

5.6% headline

inflation now I know that it understates

the level of inflation but we're using

the same metrics the same formula today

pretty much that we

used in

2007 2008 so again back then the CPI

5.6% today 2.5 but now let's go back to

the com bust and we see inflation rate

back then

3.6% but wait a minute wait a minute

wait a minute wait a minute how on Earth

could there be a high probability that

we are going into a recession or we're

in one now or we'll be in one within the

next let's say six months if we have

positive

GDP I mean if you look at the last

number I did not see negative

GDP and and wouldn't this be a

prerequisite therefore if we don't have

a contraction in economic growth how on

Earth can you argue the FED should be

cutting 75 basis points in fact how can

you even argue that they should be

cutting interest rates at all for

heaven's sakes well let's go back to

2008 and we see in Q2 GDP was almost 2%

2% positive not 2% negative so my point

here is that there's very little in the

macroeconomic data especially when you

look at this through the lens of history

that would lead you to believe the FED

even at

4.75 has interest rates too low if

anything they've got interest rates much

too

high step number three whatever you do

don't listen to me don't Listen to

George gamon you've got to listen to the

marketplace more

specifically you got to listen to the

2-year treasury yield and is Jeff

gunlock always points out correctly the

FED historically just follows the 2-year

treasury let me show what I'm referring

to going to look at a chart going all

the way back to 1995 to today's date on

the left we go from 0% being the middle

then we go up to 2% down to a negative

2% % this represents the spread between

the 2-year Treasury and the FED funds

now it's important to not just look at

the Delta we're going to do that in a

moment but we also have to notice editor

go ahead and throw up the chart that

what Jeff gunlock was saying as far as

the FED following following the two-year

meaning the twoyear moves first is spot

on editor go ahead and highlight the

Cycles we referenced in step number one

to give the viewer a visual as to how

this always happens the 2-year goes

first and then the FED catches up so now

let's get back to the spread more

specifically and we can see that we are

at an alltime almost at an alltime

extreme right now as we speak in fact

we're pretty much at the exact same

level as we were when the FED started

cutting rates prior to the GFC and if we

also look at the com bust we see we were

at a 1% spread in other words the

two-year treasury was 1% 100 basis

points lower than fed funds but it's not

even close to where we are today now

another thing I want to highlight is

when the FED drops rates and catches up

to the 2-year treasury it's not like the

2-year treasury just flattens out goes

sideways and then starts to go up

absolutely not the 2-year treasury

usually goes down even further and in

fact it usually goes down a lot further

so we have to ask the question where is

the 2-year treasury yield trading right

now and we can see that it's right

around

3.6% while the FED just dropped but they

dropped to

4.75% that means the Delta is still over

100 basis points and if history is a

teacher it reveals that even if the FED

starts dropping a lot faster then they

would currently admit the two-year

treasury will just go down at the exact

same Pace in other words the FED is way

off sides according to the market even

though they've dropped 50 basis points

from

5.25 down to

4.75 and I know right about now I'm

probably getting a lot of push back from

the viewers in fact I was probably

getting it starting in Step number

one and they're saying oh my gosh George

how could you be so ignorant the

elephant in the room is obviously the

1970s in fact the gold price lately has

been ripping higher telling us that the

FED is dropping rates too soon not that

the FED hasn't dropped rates enough all

right well first let's go back and I

want to compare two charts I want to

compare a chart of the gold price over

the last let's say year and a half two

years and look at the gold price prior

to the GFC and you can see that these

charts line up almost exactly so the

fact that gold is ripping higher isn't

exactly proof in and of itself that the

FED dropped rates too early and now

let's go ahead and look at the 1970s

because the argument there is well we

had these inflationary recessions and

the mistake Arthur Burns made or the

Federal Reserve at the time was they

dropped rates too soon and this led to a

re acceleration of consumer prices and

it took Paul vulker coming in and

jacking rates all all the way up to

18% to actually break the back of

inflation okay that's a fair argument

but I'd like to point out that during

the 1970s we had periods of

disinflation meaning consumer prices

were going up at a much slower rate so

let's compare this to the S rule so we

see that in the 1970s when the S rule

was triggered and we're just using this

as a proxy for the the unemployment rate

or the labor market softening and we can

see this was followed every single time

by the inflation rate going down not

going up meaning we didn't have a

reacceleration of inflation unless the

unemployment rate was going down or at

the very least flat and now we have the

opposite where the unemployment rate is

going up now I'm not saying the Phillips

curve the inverse relationship between

unemployment and inflation is correct

because we see the 1970s disproves this

but what you have to look at is the

trend not just the inflation rate or not

just the unemployment rate throughout

history do we see examples of the

inflation rate consumer prices

skyrocketing while at the same time

unemployment is spiking straight up as

well I can't find any at least not in

the 1970s but George George George what

about the money printing you're

forgetting the fact that M2 money supply

went up by

25% between 2020 and

2021 my gosh the fed's balance sheet is

at 7 trillion for heaven's sakes and all

that money is still slashing around the

system okay fine but let's go back to

the the 1970s and we see that it is true

every single time we saw a massive

increase in M2 money supply it was

followed by an increase in consumer

prices but it was just followed by one

wave of consumer prices it wasn't

followed by multiple waves of consumer

prices so my point here is that once you

have that money supply work its way

through the system prices adjust

but they don't keep going up and up and

up and up unless you're adding more and

more and more money supply which is what

we saw in the

1970s and we've seen the exact opposite

over the past two years that once we got

that spike it didn't even flatten out M2

money supply and M1 went down therefore

I would argue it's extremely difficult

unless you get velocity to really really

crank up and that's going to be unlikely

if we are headed toward a recession but

it's extremely unlikely to see a re

acceleration in consumer prices

regardless of what the FED does assuming

the amount of currency units chasing

goods and services doesn't Spike once

again to be clear there are no

certainties there are only probabilities

so I'm just sharing with you my thought

process behind why I think the

probabilities are high

when we look back on this time frame

let's say a year in advance we'll see

the FED should have cut not by 50 basis

points but a hell of a lot more for more

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