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.