Why FED Rate Cuts May Crash Bonds (TLT ETF)
Summary
TLDRThe video discusses the Federal Reserve's recent decision to cut interest rates in the U.S. by 0.5%, marking a significant shift in their monetary policy. The speaker highlights Jerome Powell's comments comparing the current economic climate to 2018-2019, predicting weak performance for the bond market and potential gains for stocks and Bitcoin. The video also touches on inflation trends, forecasting a drop in CPI, and explores how ongoing money deletion and changes in the reverse repo facility could impact interest rates and overall economic growth over the next 6 to 12 months.
Takeaways
- 📉 The Federal Reserve recently cut the interest rate from 5.5% to 5%, signaling a strong commitment to supporting the US economy.
- 📊 The Fed's decision involved a double rate cut, a more aggressive approach than the typical quarter-percent cuts, reflecting serious economic concerns.
- 📈 Jerome Powell hinted that the current economic environment resembles the 2018-2019 period when rate cuts began, possibly indicating similar market behavior in the near future.
- 📉 Historically, after the first rate cut, bond prices dropped by 7%, while the stock market surged by 16% over the following six months. This pattern may repeat until March 2024.
- 📊 Inflation is steadily declining, with CPI falling from 2.9% to 2.5%, and expectations for further drops to around 2.1% in upcoming reports, likely driving future rate cuts.
- 🏠 Rental inflation data shows discrepancies: government sources report 6% inflation, while private sources suggest deflation, which could significantly lower official CPI numbers.
- 🛢️ Commodity prices are down by 0.5% over the last year, signaling weak inflation pressures and suggesting mild economic growth or a mild recession.
- 💵 The Fed has been reducing its balance sheet by $1.8 trillion, while the reverse repo facility has injected about $2.1 trillion into the economy, contributing to sticky inflation in 2023.
- 📉 With the reverse repo facility running out of funds, the Fed's ongoing money deletion will likely have a deflationary effect on the economy over the next 12 months.
- 📈 The bond market may experience volatility as interest rates and bond prices adjust to economic realities, with potential outcomes tied to whether the US faces recession or renewed economic growth.
Q & A
What did the Federal Reserve recently do in terms of interest rates?
-The Federal Reserve recently made a double rate cut, reducing the federal funds rate from 5.5% to 5%. This is notable because the Fed typically cuts rates by 0.25%, but this time it cut rates by 0.5% to signal strong support for the US economy.
How does the current economic situation resemble the period of 2018-2019?
-The current economy is seen as similar to the 2018-2019 period because, back then, the Federal Reserve began cutting rates, which led to a rise in the bond market and a significant stock market rally. Jerome Powell mentioned this comparison during his speech, suggesting that a similar pattern might occur.
What is expected to happen to the bond market and risk assets in the next six months?
-The bond market could weaken, while risk assets like stocks and Bitcoin are expected to perform well. This is based on historical patterns, such as the bond market falling 7% in 2019 while the stock market gained 16% during the same rate-cutting period.
How does the upcoming US election influence the stock market?
-Historically, the stock market tends to be weaker leading up to US elections but often experiences strong returns afterward. This pattern suggests that the S&P 500 could see a 16% gain after the 2024 election.
What is the current trend in inflation, and what is expected in the near future?
-Inflation has been dropping, with the Consumer Price Index (CPI) falling from 2.9% to 2.5%. The next CPI report, expected in October, could show inflation between 2.1% and 2.2%. This downward trend might lead the Federal Reserve to make another rate cut.
How does rental inflation differ between government and private data sources?
-Government data shows rental inflation at 6%, while private sources like Realtor.com indicate negative rental inflation. This 7% discrepancy could significantly lower the official CPI figures.
What does the GSG Commodities Price Index suggest about inflation?
-The GSG Commodities Price Index, which tracks a basket of goods, shows a 10% drop in commodity prices over the past year. This indicates negative inflation, supporting the idea of weak economic growth moving forward.
What role does the US 10-year Treasury yield play in determining real interest rates?
-The US 10-year Treasury yield, currently at 3.7%, is influenced by inflation and the Federal Reserve's actions. While inflation is falling, the Fed's rate cuts are slower than desired, causing the 10-year yield to be caught between these two forces.
How has the Federal Reserve's reverse repo facility influenced the economy?
-The reverse repo facility, which stores excess cash from commercial banks, has drained about $2.1 trillion into the economy over the past 18 months. This has effectively stimulated the economy by around $1-2 trillion, contributing to persistent inflation in 2023.
What is expected to happen to interest rates if there is weak economic growth versus stronger economic conditions in 2025?
-If weak economic growth or a recession occurs in 2025, bond interest rates could drop below 3%. However, if stronger growth or higher inflation arises, such as from tax cuts or tariffs under a Trump presidency, interest rates could increase.
Outlines
💼 Federal Reserve's First Rate Cut and Economic Outlook
The Federal Reserve (FED) in the United States made its first rate cut of the current economic cycle, reducing the FED funds rate from 5.5% to 5%. This decision, seen as a double cut, signals the FED's serious intention to support the US economy. Despite expectations of a quarter-percent cut, the more aggressive reduction aligns with economic projections, including lower GDP growth and higher unemployment rates. The script emphasizes a comment made by Jerome Powell comparing the current economy to 2018-2019, suggesting a similar market trajectory for bonds and stocks in the coming months, with potential growth for risk assets like Bitcoin and stocks.
📉 Real Estate Inflation and Its Impact on CPI
The second paragraph focuses on the discrepancy between government-reported rental inflation and actual data from private sources like Realtor.com. While government data shows a 6% increase in rental prices, real-world data points to deflation in the rental market. This difference could drastically alter CPI (Consumer Price Index) figures, potentially bringing inflation close to negative territory. The commodities market also shows a 10% price drop over the last year, suggesting a slowdown in economic activity. This could signal weak growth or a mild recession moving forward.
🏦 Federal Reserve’s Money Management and Economic Impact
The third paragraph delves into the Federal Reserve's money management, contrasting the effects of the Fed's balance sheet reduction and its Reverse Repo facility. The Fed has deleted $1.8 trillion from the economy, while the Reverse Repo facility, which stores commercial banks' excess cash, has injected $2.1 trillion back into the system. This contradictory policy has stimulated the economy, explaining why inflation remained high in 2023. The shrinking of the Reverse Repo facility, with only $300 billion left, signals that future money deletion will reveal its true economic impact in the coming months.
Mindmap
Keywords
💡Federal Reserve
💡Rate Cut
💡Fed Funds Rate
💡GDP Expectations
💡Unemployment Rate
💡CPI (Consumer Price Index)
💡TLT ETF
💡Reverse Repo Facility
💡Money Deletion
💡Commodities Price Index
Highlights
The Federal Reserve just made its first rate cut in this economic cycle, reducing the FED funds rate from 5.5% to 5%, signaling strong support for the US economy.
The FED implemented a double rate cut instead of the usual quarter-percent cut, indicating the seriousness of its economic support measures.
Key economic projections include weaker GDP expectations and a slightly higher unemployment rate over the next few years.
Jerome Powell mentioned that the current economy resembles the 2018-2019 period, when interest rates were also being cut.
In 2019, despite rate cuts, bond prices fell 7% while the stock market returned 16%, suggesting a possible repeat scenario in 2024-2025.
The next six months could be weak for the treasury bond market but positive for risk assets like Bitcoin and the stock market.
A 16% price gain in the S&P 500 is possible in the upcoming months, especially post-US election, based on historical patterns.
Consumer price inflation (CPI) has significantly dropped, falling from 2.9% to 2.5%, and is expected to decline further to 2.1%-2.2% in the coming months.
Private inflation data from True Inflation and real estate metrics suggest inflation could be even weaker than government reports indicate.
Real estate data points to negative rental price inflation, which contradicts the government’s 6% rental inflation figure.
Commodity prices, measured through the GSG index, have dropped by 10% over the past year, further indicating declining inflation.
The US 10-year Treasury yield is currently at 3.7%, facing opposing pressures from falling inflation and the high FED funds rate.
The FED's balance sheet has shrunk by $1.8 trillion, reducing money in circulation, yet reverse repo facilities have injected $2.1 trillion into the economy since 2022.
The reverse repo facility, which stores commercial bank excess cash, has been releasing funds into the economy, boosting inflation.
With the reverse repo facility running low on funds and continuous money deletion by the FED, the true impact on the economy will unfold over the next 12 months.
Transcripts
the Federal Reserve in the United States
just did their first rate cut in this
economic cycle we are going to focus in
this video on real data and what the
economy is going to tell us about future
rate cuts and what could also happen to
interest rates Jerome power just cut the
FED funds rate which is known as the
overnight or one-day interest rate in
the United States from
5.5% down to 5% when a central bank
starts to cut interest rates usually
they begin with quarter % Cuts however
in this case the FED just came out with
a double rate cut in their first meeting
to Signal they are very serious about
supporting the US economy we also had a
press conference and a summary of
economic projections honestly the main
changes we saw were slightly weaker GDP
expectations and also weakness in terms
of a slightly higher unemployment rate
expected this year and also following
years to keep this video nice and unique
against other YouTubers in the
mainstream media I'm going to focus on
one major statement that I think
everyone else missed from Jerome pal it
was kind of a throwaway statement but
honestly those are the ones that are
probably the honest opinion of the
Central Bank chairman during his speech
in question time he let it slip that he
actually sees our current economy as
similar to a 2018 going into a 2019
circumstance just a quick reminder for
you what happened in 2018 and 2019 the
Central Bank just started cutting
interest rates which is funnily enough
what we just saw here putting up on the
screen a trading chart with the red and
green Candlestick being the S&P 500 the
stock market price we also have in the
pink the FED funds rate and finally the
dark purple is actually the TLT ETF or
the bond price measurement leading into
that First Rate cut we saw a massive
increase in the price of the TLT ETF the
bond market and we have seen almost the
exact same Playbook this year in 2024
about a 13 1.5% return and from that
first Ray cup we saw about a 1% cut in
the FED funds rate over the course of
about 6 months and the bond market
against expectations did not perform
very well in 2019 with those rate cuts
the bond market fell 7% at the same time
where stocks are crashing 7% we had the
stock market return 16% in that same
six-month period with Drome power
accidentally dropping this gem for us we
see that the next 6 months for us could
actually be a weak time for the treasury
bond market and actually a positive time
for risk assets like Bitcoin and also
the stock market honestly I can actually
see that same Playbook happening from
now until about March of next year we
have the election coming up which
usually has maybe a bit of weakness for
the stock market maybe bonds can go a
little bit higher but as soon as the US
election is over we usually see some of
the strongest stock market returns so
that 16% price gain in the S&P 500 is
entirely possible for us and with so
much money going towards the stock
market usually you start to see money
flowing out of Treasury bonds and hence
that's how we could see bond prices
actually fall in the next 6 months with
that General playbook in mind we're
going to look over some data to try and
predict what's going to happen to the
FED funds rate moving forward CPI
inflation consumer prices is absolutely
plummeting in the last few months we had
a drop from 2.9% to
2.5% as of the August report and the
next report that's coming out so that
would be September's inflation that is
going to drop to around 2.1 to
2.2% that inflation report comes out
around the 12th of October that will be
the last report the Federal Reserve sees
by the time they make their next
interest rate cut decision just after
the US election and therefore I think we
could get another double cut a half a
percent cut because they're going to see
inflation data absolutely falling
through the floor and that's the
government numbers the private company
measurements basically from True
inflation and also real estate data is
pointing at inflation being even weaker
than the government surveys the most
trusted private company that measures
inflation is true inflation and their
chart here actually measures inflation
from total price increases from
September of 2021 a bit weird but you're
going to see throughout 2021 and 2022 we
had huge inflation about 20% inflation
over that time period but effectively
from October of 2023 until now we have
only seen a 1% increase on average
consumer prices in the last 12 months
and for the last 5 months since April of
this year we've had flat prices zero
inflation the main discrepancy in those
reports I think is actually about real
estate and Rental inflation when we take
into account the most up-to-date rental
price increases from realtor.com so from
the actual real people we have had for
the last 12 months actually negative
deflation in rental prices which is very
much different to what the government is
saying the government had us sitting at
rental inflation in the United States
around 6% that giant discrepancy of 7%
difference is literally enough to turn
the CPI from the government around 2.2
2.1% that would crash the CPI
measurement all the way down to a 0.3
negative yearly inflation if we took the
most upto-date rental data and to put
the inflation story to rest I have one
more chart here which is actually the
Commodities price chart so this is GSG
it's a price index this is measuring a
nice basket of all the Commodities that
you can think of it's about 40% weighted
by crude oil but you have things like
copper prices copper wire you have steel
iron ore uranium uh coal prices and you
even have food prices like soybeans and
wheat so you can think of this as a
really good forward predictor of
inflation and when we look at this price
chart of GSG we are actually negative in
terms of of that inflation measurement
we are netive
0.5% when it comes to a yearly change if
anything we've had a 10% drop in
Commodities at the same time those
interest rate expectations have been
plummeting so in other words what we are
seeing is the market price in basically
a mild recession or a pretty meager
economic growth moving forward let's try
and predict what's going to happen to
interest rates in the real economy from
that inflation story and what we've seen
now the interest rates in the real
economy are priced by the US 10-year
treasury yield that's the interest rate
you get paid every single year when you
loan your money to the US government for
10 years that interest rate is currently
sitting at
3.7% and we are kind of in a tug of- war
between what inflation is telling US
inflation going to 2% maybe lower
however that's counteracted by the
higher fed funds rate currently sitting
at 5% so we're going to naturally see
this 10-year interest rate kind of stuck
between those two measurements we would
all love the FED to start cutting
interest rates much faster than what
they are 50 basis point Cuts every
single meeting and that's what we need
in order to see that us 10-year interest
rate continue to move lower the data I
save for for the final part of this
video is a bit more hardcore so if you
want to know how the Federal Reserve
actually works in terms of money flows
you don't really see this talked about
on the mainstream media ashole we are
going to look at what's happening at two
major money facilities at the Central
Bank think of the Central Bank the FED
as a bank for your commercial Banks they
control the money deletion and the money
printing for all of your JP Morgans Bank
of Americas Etc the most famous Central
Bank facility is the fed's balance sheet
that's where they print money to buy
treasuries which floods money into the
real economy through the US Treasury we
have slowly seen the FED delete around
$1.8 trillion from existence over the
last few years that might sound quite
dramatic but when you also take into
account the money printing they did
during The Rona lockdowns they were
basically still stimulating the economy
around $2 trillion since July we've seen
around a100 billion get deleted from
existence that's $100 billion less that
floods into the banking system that then
gets loaned out to Consumers and
stimulates the overall economy we are
going to contract that against literally
the exact opposite type of facility
still owned by the Central Bank the
reverse repo is a facility that stores
spare cash from commercial Banks and
they get paid the FED funds rate in
interest rate so to quickly contrast the
two the central bank is money printed
that's shoved into the economy the
reverse repo is a money storage facility
they're the exact opposite of each other
what is kind of funny about this is the
central bank has been saying they've
been trying to fight inflation since
really 2022 however the spare cash
reverse repo facility has actually
drained and sent money into the economy
at a rate of about $2.1 trillion over
the last 18 months in other words we've
actually stimulated the economy since
20122 by the central bank by about $300
billion and that goes into the financial
system into banks that get loaned out to
real businesses real people so that
actually has a multiplier effect we've
probably stimulated the economy
somewhere around $1 to2 trillion nobody
really knows the exact number if you
ever wondered why inflation was so
sticky in 2023 in the United States but
it also flows to other countries as well
it was all due to the reverse repo
facility however no one likes to talk
about it mainstream media Dron pal and
his press conferences because they would
have to admit they did about 2 and a
half trillion doll too much stimulus
during that 2020 and 2021 period and you
might asked Brock why do I care about
this right now it's because that reverse
repo facility just dropped $100 billion
since July which is kind of a spoiler
that happened at the same rate as money
deletion however the reverse repo
facility is running out of money we only
have $300 billion left and there's no
way that's going to keep up with the $40
billion of money deletion that's
continually happening on the central
bank's balance sheet and therefore we
are finally going to see over the next
12 months what money deletion effect at
the central bank is really going to do
to the real economy wrapping up the
video in terms of the effect on interest
rates that money deletion policy should
actually have a lowering price effect on
the TT ATF and higher interest rates
when we pose that story against the Fed
rate cuts and inflation we are going to
see a volatile or kangaroo type Market
where the bond market starts to figure
out where interest rates and bond prices
should truly be this is where you need
to ask yourself do you think that we are
going to see a weak economic growth or
even recession in
2025 if you think that's going to happen
we could see bond interest rates drop to
below 3% if we go back into a stronger
economy higher inflation if we get a
trump presidency for example if he
actually puts on tariffs Cuts taxes
stimulates the economy then that is all
actually inflationary which would
actually be a bad thing for treasury
bond prices is and you'd see interest
rates actually go higher so comment down
below what you think is going to happen
to interest rates in the real economy I
want to thank my YouTube members who
sponsor the channel for $1 a month
thanks for your time guys see you next
time bye
Voir Plus de Vidéos Connexes
The Fed Just Changed Everything - What You Need To Know NOW!
They Just Declared WAR on Your Gold & Silver Investments - Peter Schiff New Interview
「薩姆規則」觸發⚠美國1500萬人將失業😱?|又一「衰退警號」?|聯儲局不減息屬玩火|投資甚麼自保?🙏【施追擊】#股市 #美股 #投資 #crypto
The Truth About Interest Rate Cuts
MODE PANIQUE | L'économie canadienne se détériore.
Who Controls Monetary Policy in the U.S.?
5.0 / 5 (0 votes)