FOMC: Policy and Aftermath

Hey everyone and thanks for jumping back Into the macroverse Today we're going to talk about the December fomc and the recent interest Rate hike by the Federal Reserve if you Guys like the content make sure you Subscribe to the channel give the video A thumbs up and also check out into the Cryptographers premium uh into the let's go ahead and jump In so as we anticipated and as markets Anticipated with about an 80 prop Building going into this the Federal Reserve has in fact raised interest Rates by 50 basis points Powell Basically advertised as much at his most Recent speech just a few weeks ago so Really no surprises on that front a 50 Basis point rate hike is more or less What was suggested it's what the markets Thought we were going to have and at the End of the day That's what we got right To go back to to sort of listen to some Of the things that Powell said today I Just want to read off a few quotes just So we kind of get in the in the same Line of thinking that that Powell is in And has been in for for quite some time Now He started off the meeting by saying Something that he normally says and that Is we understand the hardship that high Inflation is causing and that we are

Strongly committed to Bringing inflation Back down to our two percent goal later On in the meeting someone asked if they Would likely Re-re-do their goals for inflation so Basically if they would reconsider their Target rate there has been a lot of Discussion over the last year that the Federal Reserve would eventually raise Their target rate because inflation will Remain sticky I don't think that's Likely going to happen but now the Question was given to the FED directly Today and this was Powell's response he Said changing our inflation goal is Something we are not going to think About and then he went on to say we are Not going to consider that under any Circumstances now could there be Something in the future to change that I Don't know but at this point Powell was Fairly clear that they are committed to Getting inflation back down to their two Percent objective and not change Changing it to three percent or four Percent or anything like that He also said something along the lines Of and this was when he was asked about The unemployment rate and the general Expectation for the unemployment rate I Believe according to the SCP is now 4.6 Percent by the end of next year which Would represent uh you know I think like 1.6 million jobs being lost between now

And then now and then something like That and Powell was out sort of about That and one of the things he said was I Wish there was a I wish there were a Completely painless way to restore price Stability stability there isn't all Right so you know this is pal Recognizing that there is going to be Likely some pain felt and that they wish There was a way to get inflation back Down to this two percent Target but he's Sort of admitting that the only way for Us to get there is for the labor market To experience some pain and to Ultimately loosen up and I if if you're Curious why he would say something like That especially I mean it seems like Inflation has come back down a little Bit recently if you go take a look at if You go take a look at the inflation rate Year over year You could argue that it's what you know It's it's on the right path right you Know it certainly looks like it's on the Right path However Powell was once again adamant That this is nowhere close to being what They need to see to Confidently say that inflation is going Back down to the two percent level and I Think he even said one of the things That Powell said today was I wouldn't See us considering rate Cuts until the Committee is confident that inflation is

Moving down to two percent in a Sustained way he also said something Um that he he reiterated this a couple Times but he said Um he did say the historic records Cautioned strongly against prematurely Losing policy we will stay the course Until the job is done this of course is Something you said many times the reason He says that is because back over here You could argue that there was some Premature There was some premature loosening of Policy and and inflation ended up going Straight back up so while it looks like It could be headed down there's nothing To say that it can't just go right back Up and I think Powell is wanting to Avoid something like that they would Rather over tighten and I think he said That a meeting or two ago they would Rather over tighten and and then have The ability to cut rates than to not Tighten enough which would lead to sort Of this spiraling inflation issue where Wage you know wage Wage inflation spirals out of control Just because they're the the labor Market remains relatively tight he said That the participants continue to see Risk to inflation as weighted to the Upside and it will substantially it will Take substantially more evidence to give Confidence and inflation is on a

Sustained downward path now one of the Things I wanted to talk about here is is The initial reaction right because when The 50 basis point rate height came out This was the General expectation by Markets but most of the move right a lot Of the move that occurred Actually occurred before Powell started Speaking right there was a significant Drop in in some of these risk assets Before Powell started talking and I Think if you if you really dug through Why did the market see such a a sharp Pullback well one It's a market right and and and day Traders are going to day trade doobie Speculators are going to speculate and In the short term it could be just a a Buy the room or sell the news right you Know buy the rumor that 50 bases what's Going to happen and then when it Actually happens to sell the news type Of thing you know I don't spend too much Of my time speculating on this type of Stuff because you can find a narrative To support anything you know you could You could use the same headline To say you could use the same headline And then just sort of flip it right like It could be that if the market had gone Up the headlines would have read Something like you know markets rally on The FED slowing down interest rate hikes But if they go down it'll just be you

Know markets rally because the Federal Reserve keeps raising interest rates Right or markets fall because the Federal Reserve key phrasing interest Rates so you can always come up with a Narrative to support any type of price Movement that's not very difficult but One thing I wanted to point out is the SCP the summary of economic projections And and arguably this had some effect on That initial move by risk assets if you Take a look at the Dot Plot they they Reference this often in their in their In his speech If you're not familiar with what this is This is the fomc participants assessment Of appropriate monetary policy midpoint Of target range or Target level for the Federal funds rate so for each year you Can see all these different people who Filled out this survey where they think The terminal rate will end up being okay That what they think an appropriate Terminal rate would be Or at least maybe the terminal rate is Not uh is not the right way to say it But just where will it be you know by by That year right where will it be in that Year and you can see of course for 2022 It makes sense that they're all on the Same line right Four and a quarter to four and a half Percent that's where the target range is Right now if you go look right four and

A quarter to four and a half percent so That's why all of these dots are on the Same line right now is because they're All agreement right that this is where It should be in 2022 because we are all Saying that we're just gonna have one More 50 basis point rate high and that's It for the year right that's it it's Going to be four and a quarter to four Four point five percent and that's why They're all in agreement where they Start to disagree of course is what Happens in 2023 and this has shifted Upward from where it previously was so That arguably is is why we saw such a Sharp sell-off in the short term not Because of the 50 basis point rate hike Because this was all but known going Into the meeting it was the shift upward In the terminal rate in 2023. Now sort Of the Target that they're talking about Is 5.1 percent right but not long ago it Was less than five percent but now it's Over five percent again I've I've said Many times I think the FED fund's Terminal rate next year is likely Between five to five and a half percent Right this is my base cases between five To five and a half percent and according To the survey All of the all of these Market Participants would essentially agree With me except for these two people here Right where they're saying and

Inarguably if if they're saying it's Going to be between 4.75 to 5 that's Already getting up to the five percent Level so you can see that a lot of the People on the committee are thinking That the terminal rate Will be higher than five percent right I Mean you have a lot of people saying 5.25 percent In that range right here here so this This line here will be 5.25 you can see There's some people right below it some People right above it and there's some There's two people that are calling for It to be above five and a half percent By the end of 2023. What I thought was interesting is There's one person I suspect that Whoever this dot is right here is Probably the same as one of these one of These dots right here there's one that That actually thinks that the uh that The the funds rate the FED funds rate Needs to stay above five and a half Percent through 2025 and only come back Down over the longer run Seems somewhat interesting right so There's at least one Committee Member Who thinks it needs to say above five And a half percent So this is I mean this is something that I I think you know markets are looking At because they're saying well not long Ago a lot of a lot of people were

Thinking that it wouldn't even go above Five percent but now a lot of the a lot Of the people surveyed are calling for a A terminal rate above five percent in 2023 so arguably this is having a a Pretty averse effect on the markets if You go take a look at Bitcoin Um you know it's been in this channel For a little while now it made that move To the top of the channel and we've had Plenty of these these flags these these Bare flags for the entire year but it Made a move to the top of the channel It's currently back down The S P 500 has has obviously taken a Pretty big hit as well it's back below 4 000. it's been all over the place uh Admittedly so it's hard to take it too Much away from this until we have until We have a little bit more time to to see Where it where it slowly evolves but Again arguably the the big hit that risk Assets took is not because of the 50 Base Point rate hike this is known Unless you want to go with the buy the Reamer sell the news type type strategy It's it's probably the SCP the summary Of economic projections where the Terminal rate is now expected by a lot Of committee members to actually be Above five percent and if that's the Case then it means simply that they need To keep raising and they will keep Raising okay you know they will keep

Raising in 2023. Powell even said this Is what he said We continue to anticipate that ongoing Increases will be appropriate now I Can't tell you it seems like every Single month for the last like seven or Eight months there's a lot of people That keep saying that this is going to Be the last Fed rate hike right this Will be the last one even going back to August or even going back to like April And May and June you know there's a ton Of people that keep saying right this is The last rate hike right no oh it'll be The one in September that'll be the last One oh wait they keep raising Beyond September November will be the last one And and December right this has been Something that's been ongoing for up Throughout the entire year And I don't really necessarily think you Can blame uh people for having this Opinion because normally the fed you Know they're not this hawkish right They're not this hawkish they they talk The talk they don't always walk the walk The difference between this rate hiking Cycle and the ones that you've seen for The last like 20 or 30 years is that we Have high inflation this time right it's Not like we have low inflation where you Know the the first sign of weakness in The economy they just cut the rates and And and say hey let's continue the party

They're not doing that right now right Because inflation is still so high it's Going in the right direction but it Still remains very elevated and so you Know this mentality of of calling the Last rate hike for 2022 it's like trying To call the bottom for you know for Crypto right it just simply doesn't Hasn't really worked out that well for People who've tried to do that so far in 2022 because if you've given it enough Time eventually the market moves lower And if you gave the FED enough time Event eventually they they raise the Federal funds rate even higher now if You go look at projections again this it It's tough to to make too many decisive Conclusions from this be right after Right after the meeting because some of This isn't even updated it's still Saying it's a 20 chance of a 75 basis Point rate high of course this will be Updated relatively soon uh to show you Know to show what really are the Expectations right now February you know February Market Participants are basically thinking it's Either going to be 25 or 50 basis points Okay If you go out to March Highest probability right now coming in At almost 51 is to be about five percent So I think the argument here is that by February or March the FED funds rate

Will probably reach around five percent Right if I had to guess I would say you Know five percent by March at the latest Right but they could do another 50 basis Point next month and if you're curious What is the likelihood of that again I Think we need to give this a little bit More time to to adjust someone asked pal Specifically right directly if if they Would actually consider going with with Lower interest rate hikes like going Down to 25 basis points he said they Haven't really talked about that yet so As always he's not going to give us a Clear answer on on all this or all this Stuff and I think he just said as always Right it's just simply dependent on Incoming data and so I don't think we're Going to have a whole lot of clarity at Least just yet on whether the next Interest rate hike will be 25 or 50 Basis points it'll probably depend on as He said some inflation data coming in Between now and then and unemployment Data probably coming between coming in Between now and then my general Expectation as of right now and as they Basically in this way for for a long Time is that the FED funds rate will Likely hit its terminal rate somewhere Between five to five and a half percent And I think they'll get there sometime Before the middle of next year at which Point they will likely pause and stop

Raising rates I don't think they're Going to immediately start cutting rates And and in 2023 again if you look at the SCP which it changes a lot so if I would Have showed you one of these a year ago It'll look completely different right And they would not have gotten their the Right expectations on on what was going To happen but for 2023 there's not Really a an expectation of a of a pivot And this this word pivot gets thrown Around to mean a lot of different things You know it used to mean QE right and Cutting rates and then it meant stopping Interest rate hikes and then now it's Like it means just slowing the pace of Interest rate hikes which is it seems Somewhat desperate to me at the the very Least a pivot is where they stop raising Rates arguably it's where they start Cutting rates is is more likely what I Would call the pivot but at the very Least I think it has to be considered When they stop raising rates they're Still raising them even if it's at a Slower price even though even though It's at a slower Pace they are in fact Still raising rates and In 2023 there's not really a general Expectation of a pivot by the Federal Reserve to start cutting rates in fact 2024 looks like a more realistic Timeline for that right and then kind of Going down in 2025 sort of lines up if

You if you follow the channel right with Bitcoin it sort of lines up with the Next having right could be a good Narrative right the fed pivoted and and You know money is cheap again we have a New we have a new having and you know Whatever that narrative is going to be Right we have plenty of time to figure It out but you can kind of see how Things are lining up right so we still Have I I think we still have a bit of a Choppy Market to go and of course risk Assets in general have sold off I mean The s p is back below 4 000. Bitcoin is Is currently coming in at 17.7 after Once again getting rejected by the top Of this of this you know uptrend Channel If you want to call it a bear flag and Call it a Bear Flag but that's where we Currently stand so hopefully this update Is is worthwhile and has given you an Idea of what happened during the meeting If you missed it and of course we will Continue to follow this remember the Yields are are are they can be somewhat Attractive if you're not sure about risk Assets and you don't know where to put Your money there's always these treasury Yields and you know one thing that I Like to do Is and I'll talk about this that much on The public Channel because I just think It's somewhat boring and No One's Gonna Really care but one thing that you could

Always do not Financial advice of course Is you can always just put it in one of These shorter term treasury yields right I mean if you put your money in there For a month or three months or six Months and say you know what I'll get The yield and then I'll see what the Market looks like in a few months right Nothing wrong with that I've been Basically doing that for the entire year Right that's why I say cash is king Um but again there's there's shorter Term treasuries there's longer term Treasuries the longer term treasuries Yeah they don't really they're not Really believing it to be completely Honest right they sent they sense that The economy is feeling a little sick and You can kind of see they've been pulling Back significantly here basically since October So the longer term yields the long end Of the curve still suggests that the the Economy is starting to get a little sick And and that the Federal Reserve will Not be able to raise rates Um too much longer and if they do they Probably won't be able to keep them There of course that's what the bond Market thing I mean the bond market that Says one thing Palace has another so far right I mean Powell's done what he said he's going to Do and that's raise interest rates and

And that's to say they're going to keep Raising them and and they'll hold them At a highly restrictive level until the Job is done until they get down uh until They are confident they're on a Sustained path back to two percent which Is their target so again hopefully you Guys enjoy the content make sure you Give the video a thumbs up subscribe to The channel if you're not subscribed we Also have a telegram Channel if you want To discuss this stuff in the description Below if you want to talk to 40 000 of Your closest friends make sure you join That thank you guys for tuning in I'll See you next time bye


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