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.
