The Fed JUST Bailed us Out AGAIN | What do they SEE?!?!?!

Well, this is starting to look a little weird. We just had the vice chair of the Federal Reserve rate setting committee come out again to help bail out markets. We'll talk about what he just said in a moment, but what I want you to pay attention to is when he said it. So, the first time he made his comments were right here when we were at the 735 line and the Nasdaq was having its 1 2 3 4 5th red day in a row. We're bouncing on the 735 line, people are nervous, and all of a sudden what helps us get to ALL-TIME HIGHS? OH, maybe we don't actually need an interest rate hike in October. In fact, this was the September 29th article. Fed Williams hints that the next rate increase can actually wait. And remember, he's on the rate setting committee, and he says the action that we took in September suggests there's no need for urgency right now. We can actually just wait. And this is similar to Bowman yesterday or over the weekend going, "Oh, you know, we can potentially, you know, raise rates once quickly and then kind of just just chill. We could just do nothing for a while." This is all exactly what Kevin Warsh generally does not want to do, which is provide forward guidance on what the Federal Reserve is thinking. And here we are again. The market is red yet again, and what happens? Almost as if on cue, the magician comes in. Ah, Mr. Williams, just crossing the tape right now. Here we go. One more interest rate hike is likely appropriate this year. Disinflationary forces are still at play. There are no broad price pressures outside of AI and energy. Boy, now that is something we can dispute. No sign the labor market is contributing to inflation. Well, that's true. We'll talk about that as well. This is not an economy that is overheating. AI is inflation driver, the inflation driver I'm watching most closely, and sees no need for rate hikes in 2027 at this time. Oh boy, all right. We have some things to unpackage there, but let's take a look at what's going on with markets right now. So, right now we're pricing in only a 23% chance of a rate hike in October. So, we are now actually slightly increasing our chance of a rate hike by the end of the year with an 88 uh yeah, about an 88.2% chance that we are going to get a rate hike. That's adding both of these numbers together over here on the right. So, about an 88% chance that we're going to get a hike by the end of the year. However, remember by September of next year, markets have actually been pricing in quite a lot of rates. In fact, there's a 2.7% chance we go all the way up to 5.25. That would be another 150 basis points or six rate hikes. So, that's six rate hikes right here. Here's five. Five rate hikes has a cumulative somewhere around 14% chance. Five more, right? Four more rate hikes has call it 14 plus this, call it 15, 40% chance. So, you can see what I mean here. Six, five, four, three more rate hikes. These are uh pretty high odds. In fact, the odds of three rate hikes over here would be the combination of what, 40 and 32 over here, about 72% chance that we get three more rate hikes. And now you've got Waller coming out going, "Uh, you know, maybe we don't actually need all of those rate hikes. Maybe we just need one more and then it'll kind of be like, uh we did one, we skipped a meeting, we did one more, and then we're good. We're we're done. Everything's fine. We solved it all." Okay, what could be motivating this? A few things could be motivating this. One would be concern that the rate hike moves they are making isn't actually going to do anything. This is something we talked about this morning and I tweeted about yesterday. I said look, the Federal Reserve says they are hiking because of artificial intelligence and oil prices. But wait a minute, you can't control either of those because they're both supply issues and the Federal Reserve doesn't control supply issues. There's nothing you can do. There's no amount really, I mean I I suppose there's somewhere there is, but raising rates 25, 50, even 100 basis points isn't going to stop Microsoft from investing in artificial intelligence or Amazon or whatever. It's just it's not going to do anything. What it's going to do is it's going to crush jobs and crush the labor market, which is really heavily reliant on artificial intelligence. So uh labor market kind of weak and you know, the numbers look good on the weekly, but when we actually look at the labor market, we're like but the components of that are mostly construction and jobs related to benefiting from AI, whereas the people losing jobs are people losing on the AI side such as call center workers, obviously. And that's happening, you know, across the globe. But what's remarkable is that shows weakening and this is another thing the Federal Reserve can't control. So he's right when he says there's no inflation coming from the labor market. I believe that. But this idea that oh yeah, if we raise rates, we're going to somehow slow down the data center build out. No, you won't. And you're certainly not going to print more barrels of oil at the Federal Reserve. So the whole idea of raising rates is just to manipulate markets to our and this is what I tweeted yesterday is this is all just an attempt to manipulate inflation expectations by proving that Wurst has the pants to put the pants on if he needs to. He can walk around with short shorts and not raise rates, but if he needs to put the pants on and raise rates, he is more than happy to do it. Uh and so if you actually look at the five-year inflation break-even rates, they hiked uh in right about here. This is when they hiked, and markets were pricing in, "Oh my gosh, is this guy actually going to have the pants? Is he going to do it? Is he going to do it? Is he going to do it?" Right after he hiked, that five-year inflation uh break-even rate came down, and it's, you know, it's been relatively stable. This is uh over the last uh 12 months or so here. So, it's not like we're running away with expectations. Their job has pretty much been accomplished, and this idea of "Hey, maybe one more, and then we're done." in my opinion is a little bit more revealing because it suggests there's some more sensitivity going in the on in the market that's making people a little nervous for a different reason. I think what's happening is there's this massive suckening going on. We know this. Everybody wants to raise a lot of capital. This is specifically SpaceX's $40 billion, Broadcom with OpenAI, Broadcom with Anthropic, Oracle. And as a result, you have spreads widening, which is a sign of credit risk. We'll talk about that in a separate topic. But, you have a lot of issuance, a lot of high-quality issuance. And so, people are going, "Hey, man, if I can make 8% buying a SpaceX bond, why am I going to YOLO on the stock?" At least pension funds look at it that way, or maybe life insurance companies. And so, there's a true competition for I can get enough returns over here to be in their opinion safe and as as uh you know, reasonable as possible with expectations for returns. Uh and the risk premium that we're getting for investing in stocks is just too small to justify giving up or foregoing that 8% I could get on a bond, let's say. Now, if I look over at the 10-2 spread, we touched on this this morning. It's been falling, but it's been falling since before Williams spoke. My belief was that's because the 10-year is starting to indicate, "Okay, we might actually be getting an Iran deal or some of those longer-term inflationary effects might start subsiding, which is good, while the 2-year is stable. So far, that spread continues to be about 42 basis points, which is good. Now, regardless of whether or not we have a deal with Iran or whatever, it's worth noting that they mentioned Well, Williams here suggests that inflation does not appear to be broad-based inflationary pressure. Well, I kind of disagree with that. If right now, and and this gets a little tricky to just verbalize, so I'm going to visualize it really quickly. Here's how this works. If you take the consumer price index right now, and you put it all on a table. I was doing this on my American Airlines flight yesterday. You know, this is These are the things that keep me going. I'm like, all right. Why don't we put them all into one filtered category, so we don't have like headlines and stuff like that in CPI. And then let's sort them from high to low, and then let's find where 3% is, and then let's take everything above 50%. Let's count up all of those, so I get X. And then we're going to divide that by the total, so X divided by the total. All right, T. It was somewhere around 186, something like that, divided by I want to say it was like 348 items. That It worked out to 54%. 54% of CPI categories had inflation year-over-year above 3%. Now, the reason I looked this up is because this is exactly what Kevin Warsh always refers to. And so, I thought to myself, huh, well, I may as well go see exactly the data that he's referring to because he's mentioned it like two or three times now on press conferences. And so, I'm like, let me go see how I can calculate it myself. And so, I did, and I'm like, eh, it's not ideal. I mean, this is going to be what we're looking for in CPI, obviously, tomorrow. Is We'll do that calculation again. You can come join me. Probably be live here on the channel at 5:30 in the morning. Uh good old early mornings. It's okay. We're early usually that time anyway for course members. Uh so, what's what's curious to me though is why all of a sudden do they have to come out so aggressively? Is something starting to break? It's possible. JP Morgan thinks private credit defaults are a lot higher. CoreLogic's numbers aren't looking good. SpaceX bonds have sold off. There's a lot of concern that maybe the credit market isn't able to yet it's either not mature enough yet or there's some cracks or something's breaking. Uh and if for whatever reason the artificial intelligence spending breaks, well, then you're going to you're going to hit hit pretty nastily across the entire economy and you won't be worried about uh wages creating inflation. You'll be worried about keeping jobs up at all. But anyway, uh Williams went on then to say that the reason for the September rate hike starts from {quote} risk management. And he firmly supported the September rate hike. Now he says rate the rate path going forward will be more about maintaining a balanced economy, which is interesting. Uh this this idea of, "Hey, you know, we're just going to take this easy here. There's no rush to fight the fight inflation." That's sort of the commentary that we're getting out of uh the Federal Reserve today. And it's a little strange because it just, you know, these comments dropped right here. You can see where this giant candlestick is right here. So, you've obviously gotten a little bit of a boost in the stock market here. You're not coming down to that 735 level at all. You're getting supported by this commentary that, "Hey, maybe markets are being a little too aggressive in how much they're pricing in for rate hikes." Uh so, as a result, now you've got some recovery on chip stocks. Look at that bounce off of 355 for Broadcom. I think that's a great entry, actually. And then over here, Nvidia 227 bounced back, pretty fantastic. So, there's a lot of concern. But, the Fed seems right now keen on propping this market up. So, whatever it is that they're seeing, it's enough to justify sending out the vice chair of the rate setting committee to say, "Hey, boys and girls, maybe we maybe we need to start forecasting a little bit more of a a slower approach to this aggressiveness the market is pricing in." Anyway, we'll talk more about this in our course member live stream. So, just remember you can always join by going to reinvestone.com. Thanks so much for watching. If you like that video, check this one out. I think you're going to love it. >> Why not advertise these things that you told us here? I feel like nobody else knows about this. >> We'll we'll try a little advertising and see how it goes. >> Congratulations, man. You have done so much. People love you. People look up to you. >> Kevin Paffrath, a financial analyst and YouTuber, Meet Kevin. Always great to get your take.