It’s NOT Over Yet! What The Latest Fed Minutes Show Us 🤔

If you thought that the Fed was done Raising interest rates think again That's because last week the Federal Reserve released the minutes of its most Recent meeting and it revealed that its Top brass are determined to stay the Course this was a surprise for many as Jerome Powell has talked a lot about Disinflation recently yet the minutes Did not mention it even once today I'm Going to summarize the minutes of the Fed's most recent meeting and tell you Exactly what they could mean for the Markets Let's start with a quick recap the FED Has been raising interest rates to fight Inflation since last spring higher Interest rates make it harder to borrow Money and makes existing debt more Expensive the result is that money flows Out of all assets hence why the markets Have been mostly crashing I say mostly Because the stock market and the crypto Market have basically been rallying Since late last autumn this rally was Caused by a combination of factors Namely expectations from investors that Inflation was coming down and leveraged Traders having to cover short positions Or getting liquidated expectations that Inflation will come down are bullish for The markets because they suggest that The FED will pause or even lower Interest rates which will cause money to

Flow back into markets as for leveraged Traders those who went short were caught In a short squeeze now this market-wide Recovery rally seems to have peaked in Early February if you watched our video About the fed's press conference you'll Know that's because Jerome Powell Essentially said that inflation is Starting to come down which caused the Markets to Rally in anticipation of Lower rates This celebration was short-lived however Because just two days later the jobs Report for January came in it revealed That the U.S economy had added 512 000 jobs in January putting unemployment At 3.4 percent investors were expecting An increase of just one hundred and Eighty seven thousand and 3.6 Unemployment for context the FED is Supposed to keep inflation at around 2 Percent and unemployment at around 4 Percent the FED achieves this so-called Dual mandate by adjusting interest rates Higher interest rates lower inflation And raise unemployment while lower Interest rates raise inflation and lower Unemployment The fact that unemployment has continued To go down even while the FED has been Raising interest rates therefore means That the FED has room to raise interest Rates even higher more importantly a Tight labor market means there's a risk

Of employees getting raises that are Much higher than inflation if too many People start getting raises higher than Inflation this could cause inflation to Stay higher for longer this so-called Wage price spiral is something that the FED has been extremely concerned about As such you could say that the FED has Been intentionally trying to raise Unemployment to prevent this but it Doesn't seem to be working The Consumer Price Index or CPI for January also came in higher than Expected as did the producer price index Or PPI meanwhile the personal Consumption expenditures or pce the Fed's favorite inflation measure Actually Rose in January suggesting a Second wave of inflation given that this Was the opposite of what investors were Expecting even just a few weeks earlier The markets crashed and have since Resumed their long-term downtrend for The most part It's against this backdrop that the FED Released the minutes of its most recent Meeting which took place on the last day Of January and the first day of February Former fed Insider Danielle di Martino Booth believes that the FED minutes Could have been modified in response to All the concerning inflation data so Let's see what they say shall we now the Minutes begin with an overview of the

Four new voting members of the Federal Open markets committee or fomc for Reference the fomc consists of 12 fed Officials who ultimately decide how Interest rates are changed this group of 12 changes with each year with four Rotating in and four rotating out The consensus is that the four new Voting members will make the FED ever so Slightly more dovish meaning it's more Likely to pause or lower interest rates That said the consensus is also that These fed officials will continue the Current hawkish trajectory which of Course means higher interest rates on That note fed Vice chair lail Brainard Announced her resignation a couple of Weeks ago this is significant because Lail was a dove and was the second most Powerful fed member after Jerome it's Not yet clear who will replace her but It could have a profound impact on Interest rates going forward speaking of Which you should know that the recent Crypto Crackdown in the United States is Being partially coordinated by the FED Likely by Michael Barr the fed's vice Chair for banking supervision if you Watched our video about Michael you'll Know he's extremely anti-crypto so it Wouldn't be surprising anyways the Second part of the in its give an Overview of what's been going on in Financial markets for those who don't

Know the FED doesn't like the fact that Markets have been rallying this is Because higher stock prices can lead to More spending as the average person Feels wealthier than they really are Well I can attest to that one Jokes Aside fed officials discuss the Fact that the U.S economy is likely to Slow down because of higher interest Rates but apparently couldn't agree on How bad the decline will be this is why They decided to raise interest rates by Just 0.25 rather than the 0.5 percent Which would in retrospect have been Better the minutes reveal that fed Officials still see interest rates at Around 5 which means there are one or Two more 0.25 rate hikes still to go Fed officials also stress the need to Keep interest rates High until at least The end of the year something that Investors apparently still haven't Properly priced in what's funny is that Fed officials acknowledge the recent Market rally and imply that it's Fundamentally due to the fact that if The FED raises interest rates too much This will do lots of damage to the Economy in turn the FED would be forced To lower interest rates prematurely to Prevent an economic collapse fed Officials touched on the surprising Economic strength in Europe and China's Reopening before breaking down the

Impact of the bank of Japan's monetary Policy on the value of the US dollar This seems to have been one of the most Overlooked macro factors probably Because it's quite complex in short the Bank of Japan or boj has been Artificially keeping interest rates in The country at zero by buying up the Japanese government's debt this has Caused many Japanese investors to invest Test more heavily in foreign assets However the boj recently signaled that It may raise interest rates again this Means that lots of money could flow out Of foreign assets and back into Japan it Just so happens that most of this money Was Finding its way into U.S assets Including the US dollar when the boj Gets a new governor on the 8th of April He will likely raise interest rates Which could crash U.S assets and the USD So make sure to mark your calendars Anywho the third part of the minutes Pertains to the economic situation in The U.S which you'll recall has evolved Since the fed's most recent meeting back Then fed officials were only able to Discuss December data but they drew the Same conclusions inflation is too high Unemployment is too low Fed officials admitted that there are Signs that U.S manufacturing fell Significantly in November and December This would be a sign of economic

Weakness were it not for the fact that This slowdown in manufacturing is due to A shift in demand for services instead Of goods which is a global phenomenon If you watched our video about the Potential effects of China's reopening You'll know that the goods inflation we Saw and the services inflation we're Seeing now are due to pandemic Restrictions it's not clear how China's Reopening will affect the economy and The fed's officials don't seem to know Either This ties into the fourth part of the Minutes which further unpacks the quote Financial situation fed officials Tacitly admit that the average person is Starting to get squeezed by higher Interest rates it's too bad the FED Doesn't really care unless the Government or someone on Wall Street is Getting squeezed fortunately for Wall Street it seems to be doing just fine This is evidenced by the fact that the Spread I.E the difference between Interest rates on different types of Corporate debt is narrowing and Narrowing in spreads is typically seen As a sign that the economy is doing Great which is arguably not the case fed Officials point to a similar Paradox Occurring overseas with European and Chinese stocks rallying because of a Warmer than expected winter and the

Easing of pandemic restrictions Respectively fed officials reiterate That this has further contributed to Money moving out of the US dollar Lowering its value if this sounds too Abstract think of currencies like the US Dollar as being the same as any other Asset when money is moving into a Currency usually the USD its price goes Up relative to other assets When other assets go up it means that Money is moving out of a currency Usually the USD and into those assets Now fed officials went on to underscore The fact that interest rates on existing Debts are rising and that it's becoming Harder for individuals and institutions In the US to borrow money you'll recall That this is the fundamental effect that Raising interest rates has on the Economy it just takes time to show up Fed officials also highlighted the fact That the number of mortgage defaults Credit card defaults and Auto Loan Defaults have all been rising over the Last few months although the former two Remain below pre-pandemic levels for now The number of auto loan defaults Officially surpassed pre-pandemic levels While the number of mortgage defaults is Likely to stay low due to the frequency Of fixed-rate mortgages in the United States it's not possible to have a fixed Rate on credit cards fixed rates on auto

Loans are possible but they aren't that Popular this means we could see more Credit card and autolearn defaults fed Officials don't seem to be a fan of this Setup as they take issue with the fact That housing costs remain abnormally High in most of the country they also Took issue with the fact that most Stocks remain overvalued relative to Historical price to earnings ratios Despite all the interest rate hikes This relates to the fifth part of the Minutes which covers the fed's economic Outlook it sounds like the new fed Members are more optimistic about the U.S economy than their predecessors that Said Don't expect to see the U.S economy Start to pick up until next year and Even then growth will be low the new fed Members also think that inflation will Fall faster than their predecessors did That said they still believe that Inflation will still be well above the Fed's two percent Target by the end of The year regardless of the measure this Contrasts with investors who believe Inflation will fall below 2 percent by The end of 2023. what's scary is that Fed officials don't expect inflation to Return to the fed's two percent Target Until 2025. this assumes that the U.S economy Hasn't entered a new regime which is Possible if not likely the tldr is that

Things like the onshoring of Supply Chains and low employment could keep Inflation High more about what Persistently higher inflation could mean For your portfolio using the link in the Description Now when it comes to current economic Conditions fed officials emphasize that Inflation is still too damn high and That it's going to take a quote period Of below Trend growth to bring inflation Back down to two percent This is code for recession which the FED Officials continue to see as likely to Occur in 2023 what's fascinating is that Fed officials believe it's possible that The labor market is strong in part due To the fact that it will be difficult For employers to find replacements for Any employees they fire it's also strong In part due to a general shortage of Manpower in the services sector Primarily due to retirements fed Officials also Express concerns over the Possibility that inflation expectations Could become entrenched if inflation Continues to stay as high as it has been That's because High inflation Expectations would lead to behavioral Changes that could cause even more Inflation Fed officials then discussed a few Crypto related topics including Cryptocurrency itself they expressed

Their concerns about potential runs on Non-bank financial institutions concerns About liquidity in the treasury market And relief that crypto wasn't more Connected to the financial system during Its crash call me crazy but it sounds Like the FED officials were discussing Stable coins stablecoin issuers are Technically non-bank entities most Stable coins are backed by U.S Government debt AKA U.S treasuries and One of the primary connections of crypto To the financial system is through Centralized stable coins if you're Subscribed to My Weekly Newsletter You'll know that I've recently been Concerned about the prospect of a Broader Crackdown on stable coins in the United States anyway speculation aside Fed officials repeated that their Decision to raise interest rates by just 0.25 was based on the data they had Discussed during the meeting the minutes Reveal that a few fed officials were Pushing for a 0.5 rate hike which again Would have been more appropriate in Retrospect finally fed officials Confirmed that they will continue to Sell government debt from the fed's Massive balance sheet every month the Practical effect of this selling of Assets is that it will raise interest Rates further Oddly enough the debt ceiling has

Dampened this effect as the treasury Can't issue new debt you can learn more About how the debt ceiling could affect The markets using the link in the Description this brings me to the big Question and that's what the fed's most Recent minutes mean for the markets in The coming weeks well it's clear that The feds fight against inflation is far From over just how much pain the FED Decides to inflict on the markets with Its hawkish rhetoric and rate hikes is a Lot less clear in theory the FED would Be as hawkish as possible and raise Interest rates higher than investors Expect this is simply because it would Cause markets to crash which would make The average individual and institution Feel less wealthy this would lead to Less spending which would help bring Inflation down in practice however if The FED is too hawkish or raises Interest rates too aggressively it risks Causing the kind of catastrophic crash That many investors have been waiting For this is because a catastrophic crash Would force the FED to lower interest Rates prematurely which would cause a Market rally the problem is that Lowering interest rates prematurely Means that inflation would stay higher For longer and could even turn into Hyperinflation under the right Conditions at that point asset prices

Would be irrelevant because they would Be worth a lot less in real terms if There's too much inflation that's why I Believe the FED is purposely playing Dumb in the public eye as much as fed Officials want markets to crash they Want it all to happen in an orderly Manner much like it has over the last Year this drastically reduces the risk That something in the financial system Will break on the way down if I'm Correct then it means that 2023 could Look almost identical to 2022 in terms Of price action rather than a sudden Crash we could see a slow and orderly Decline in all assets with lots of bear Market rallies in between the thing is That there are lots of black swans that Could cause a crash one of these is the Debt ceiling in case you missed the memo The US government could come close to Defaulting on its debt in the summer if The debt ceiling isn't raised soon the Last time this happened there was a Flash crash in the markets and U.S Government debt was downgraded for the First time it appears that we're likely To see a similar outcome this time Around the caveat is the fed's balance Sheet as macro analyst Andreas stano Larsen recently pointed out when the Debt ceiling is raised the U.S Government will be allowed to issue new Debt in other words it will create cell

Pressure for bonds when you combine this Selling of debt by the US government With the selling of debt by the FED what You get is a sudden spike in interest Rates in the United States this sudden Spike in interest rates could lead to Lots of Market volatility and Potentially cause stocks and Cryptocurrencies to crash Now combine this with Japanese investors Selling off U.S assets to take advantage Of higher interest rates at home and Throw in some additional selling of U.S Debt by governments that are on bad Terms with the United States such as China what you get is a recipe for a Spike in interest rates that could cause Chaos so it's safe to say that the next Few months are going to be very Interesting Besides the 8th of April the next dates To watch are the 14th and 15th of March The days on which the CPI and PPI for February will be released after that We'll have the fed's next meeting and Press conference on the 22nd of March It's going to be a wild Wild Ride Make sure you're subscribed to the Channel and ping that notification Bell So you don't miss a thing drop a like if You enjoyed today's video and I'll see You in the next one


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