So today we're going to talk about the Fed's next big move and my predictions
for 2023, because the Fed has five big issues that they have to deal with.
So just to summarize, let's take a look at the Fed.
They've, of course, increased the federal funds rate ten different times.
And this chart exactly shows how they've done it
over the year, starting in March of 2022.
And then, of course, in June of 2022, inflation was still 9.1%,
which is the point of why they're increasing the rates in the first place.
But for this video, we're going to talk about what is actually happening
as the Fed is increasing these rates and what's going on with the economy.
So most of you know that the Fed has five big issues inflation, unemployment,
banking, recession,
and of course, what are rates going to be this year and into 2024?
So this slide represents what the media headlines have been
since the Fed's meeting on May 2nd and third of this month.
So these headlines, of course, are your normal.
The CNBC is the Fox or CNN.
And one, of course, is from BlackRock, somebody that's actually in the game
managing money or everyone.
And their opinion is that they don't see the Fed cutting rates at all.
So what's the truth there? Is the media correct?
Is BlackRock correct?
So I decided to dig into the Federal
Reserve minutes themselves,
which are sitting on the Federal Reserve's own website.
So these are the minutes from the Federal Open Market Committee
meeting on May 2nd and third of 2023.
And what's included in these minutes are very different
from what you're seeing in the media headlines.
The first thing that square is the Fed
are still committed to the 2% inflation rate, which is all over the website.
As you can see here, the committee voted unanimously
to increase the rates by 25% in the month of May.
There's nowhere in this document that says that they're cutting
or pausing the rates any time this year.
However, going back to the media again, as you will see underlined here,
the federal officials were divided over a June pause.
The federal officials were less confident Fed may take its foot off the gas.
The federal officials don't agree that is going to pause interest rates.
This information does not exist anywhere in the minutes
of the federal Open market Committee on May 2nd or third.
The point here is that the media is saying
one thing and the Fed is doing quite another as representing the minutes.
You need to be careful where you're taking your information.
So here on page eight, you can see they outline
what's going on with the banking, the inflation and the unemployment.
The first thing that I want to draw your attention to is
they are addressing the banking situation.
They're saying here that they also judge that the banking sector
stress would likely continue to weigh further on economic activity.
But to the extent of what would be the case remain highly uncertain.
But they go on further to say that the underwriting for
the banks is going to become harder and harder.
Harder, which of course, we're all seeing today.
The second point here is in just another indication,
when they say with inflation well above the committee's longer run,
2% objective and for inflation only showing signs of moderation.
And participants expected that a period of below trend growth in real GDP
and some softening in labor market conditions would be needed to bring
aggregate supply and aggregate demand into better balance and reduce
inflationary pressures over time.
What this means here is that they believe wages are inflationary
and low unemployment is not necessarily good for inflation,
which indicates higher rates in the future.
The next slide The Fed actually says that what they say here
is they expect further tightening in bank credit conditions amid already tight
financial conditions which would lead to a mild recession
starting later this year, followed by a moderately pace recovery.
What they're saying here is they expect the economy to go into a recession.
Well, the definition of a recession are two quarters of negative GDP.
And as you can see, they're projecting growth of 2024
and 2025 to be below their estimate of potential output growth.
The next item is all about unemployment.
And some of you know that unemployment
is sitting in the mid threes and the Fed wants it over 4%.
But that basically means that there's going to be a lot more people out of work
this time next year.
And that's not going to be good for many people.
You got to ask yourself, why would the Fed want higher unemployment?
Why would they want to put millions of people out of work?
The reason, of course, is what?
Unemployment is low.
It puts a lot of pressure on wages driving them higher,
which is inflationary, which is the whole point
of what the Fed has tried to combat with these higher interest rates.
I would encourage all of you
to take a look at page three of the Federal Reserve minutes.
What I really want you to take a look at
is the yellow highlighted spot at the bottom.
I don't know about you guys,
but it's clear to me that the Federal Reserve's Ord Minnett
reflect one thing, that they expect the peak rate
to be maintained through January of 2024.
What that tells me,
whatever the peak rate is at the time, it's going to be at least 5.5 or higher.
And right above this highlighted sentence, you could also see that the probability
that the peak rate may turn out to be about
5.25% is actually quite high.
So what this statement tells me from the Fed's own minutes in May of this year
is that the Federal Reserve believes that 5.25 rate may not be the floor
and that they're going to continue a peak
rate through January of 2024,
which tells me there will not be any rate cuts and there may not even be a path
which is completely different from the media articles that I showed you before.
For those of you
who might not be in agreeance, these are actual quotes of people that are
on the Federal Open Market Committee and what they said after the meeting.
As you can see, the Dallas
federal chief said he's concerned if inflation is falling fast enough.
Federal Jefferson says he's willing to be patient on the policy.
And of course, while
it says I don't support stopping rates until inflation, Cole Waller actually said
that he believes that the federal funds rate could be over 6%.
Of course, Chairman Powell himself said they're going to continue to increase
rates until they reach the inflation goal, which of course, is 2%.
So what does all this mean?
What this means is we're going to continue to have a decline in real estate
prices, just like we've been seeing over the last few months.
The reason, of course, is as interest rates increase, the mortgage payments
also increase, making it harder and harder and harder for people to buy houses.
The second point is, as interest rates continue to increase,
it will also affect commercial real estate driving capitalization
rates higher and values even lower.
The second issue is that the unemployment rate is projected to increase
over what we said,
which is going to put millions of people out of work,
which is really going to affect the economy.
Rentals, housing, all of those.
The third thing are the banking concerns are going to continue.
So think about it this way.
If a bank has a loan at 3% and they're paying
you deposits at 5%, the math doesn't work.
In addition to that, as these real estate values continue to decline
and those loans start to mature, many of these assets values are going
to be worth less than the actual loans that the bank has on them.
Or a recession is probable.
It's even in the Fed's minutes.
I would expect that.
And what we could be seeing
is high inflation and high unemployment, which of course is stagflation.
We will all have to wait to see how that plays out.
The fifth and most damaging of all is that I do see rates
continuing to increase or point at least in the June meeting.
As a result of what many of the federal government
saying themselves that they're all solving to reduce inflation
even at the expense of higher unemployment,
which is going to push the entire country into a recession.