The Fed Hiked Rates 0.25%. It Won't Stop What's Coming.

Fed Hikes Rates Minimally [00:00:00]

• The Federal Reserve enacted a 25-basis-point interest rate hike, the minimum possible, driven by market expectations rather than desire.
• This hike, bringing the Fed funds rate to 3.75%-4%, was highly anticipated, with a 90% market probability.
• The speaker argues this hike is "meaningless" for inflation control.

  "Meaningless in the scheme of things. He is not going to be able to reduce inflation."

Market Expectations vs. Fed Action [00:01:15]

• Contrary to early-year expectations of rate cuts, the Fed hiked rates by 25 basis points.
• The speaker notes the Fed's tendency to avoid disappointing markets, suggesting they hiked to meet expectations.
• Investors deluded themselves into believing the hike would be positive for the market, a view the speaker calls "wishful thinking."

  "And so as long as they do what the markets expect them to do, and in fact, in this case, investors had deluded themselves into thinking that we actually needed this quarter point rate hike."

Fed's Reluctance and Unanimous Decision [00:03:30]

• The speaker believes the Fed did not want to hike rates, evidenced by past meetings where a hike was possible but not executed.
• The decision was made unanimous this time, not out of shared desire, but to project unity and seriousness.
• This unanimity is seen as part of a "show" to convince the world of their commitment to fighting inflation.

  "And I think that the reason it was unanimous was not because that's what they all wanted to do."

Insufficient Action Against Inflation [00:05:00]

• The 25-basis-point hike is deemed insufficient to combat inflation, described as "too little, too late."
• The speaker contends that a serious effort to reduce inflation would require much larger rate increases.
• The only thing reduced was the press conference length, not inflation.

  "Well, they put up, but they didn't put up enough because 25 basis points is not going to cut it."

Fiscal Policy Ignored [00:06:45]

• The Fed is criticized for staying within its "lane" of monetary policy and ignoring the inflationary impact of expansionary fiscal policy.
• Running deficits and government spending are inherently inflationary and at odds with the Fed's actions.
• True inflation control requires fiscal policy to be under control and the Fed to refuse monetizing debt.

  "And the idea that fiscal policy and monetary policy have nothing to do with one another is nonsense."

Historical Precedent and Accommodative Policy [00:09:00]

• Past Fed officials, like Paul Volcker, understood the link between fiscal deficits and monetary policy.
• The Fed's independence is meant to allow criticism of fiscal policy, a role they have failed to fulfill.
• Interest rates have been too low for too long, contributing to inflation, a gap the current hike won't close.

  "But what is also true is that interest rates have been too low for too long. And that is not a coincidence."

Fed Policy Remains Accommodative [00:11:00]

• For years, the Fed claimed restrictive policy, but spending and savings behavior showed policy was always accommodative.
• Rates were never high enough to influence behavior, making policy non-restrictive.
• Even with the hike, policy is still considered accommodative due to rising inflation outpacing rate increases.

  "The Fed never raised rates high enough to influence behavior."

Soaring Inflation and Record Highs [00:13:00]

• Inflation continues to rise, with year-over-year inflation nearing a "four handle."
• Record highs in diesel prices and oil prices over $100 a barrel illustrate the inflationary pressure.
• Rising costs extend to fertilizer and other food-related items, with no end in sight.

  "I mean, prices are soaring. Look at what just happened to diesel prices."

Negative Market Reaction [00:15:00]

• The Dow closed down approximately 600 points after the rate hike announcement.
• Gold prices, which rose before the hike, sold off significantly.
• The bond market experienced a sell-off after an initial rally, with the 10-year Treasury yield rising above 5%.

  "The Dow closed down about 600 points on the day. It was positive before the rate hike."

Rising Borrowing Costs [00:17:00]

• The yield on the 10-year Treasury is expected to climb higher, potentially reaching 6% and beyond.
• This will increase borrowing costs for the government and everyone else.
• Mortgage interest rates are nearing 7.25% and are projected to hit 8% by early next year, a 27-year high.

  "It's going to be more expensive for everybody to borrow."

Housing Market Strain [00:19:00]

• A tripling of monthly mortgage payments due to rising rates, despite a tripling of home prices since 2000, makes homeownership less affordable.
• Americans are in a worse financial position to afford homes compared to 2000, when the stock market bubble provided wealth.
• The current economic climate, with high costs for essentials, makes affording an 8% mortgage untenable for many.

  "So you're tripling the cost to buy a home, which is more than double the official increase in the CPI over the same 26 years."

Mortgage Rates to Double Digits [00:21:00]

• 8% mortgage rates are not the peak; rates are expected to climb into double digits.
• Homebuilders were significantly impacted in the market due to rising interest rates.
• Financial sectors are under pressure as rising rates pose a particular pain point.

  "You know, I think mortgage interest rates now are close to 7.25% on a 30-year fixed."

Warsh's Explanations for Rising Yields [00:24:00]

• Kevin Warsh offered three explanations for rising bond yields: economic growth, crowding out competition (hyperscalers), and geopolitical risk.
• The speaker finds the geopolitical explanation weak, as risk usually drives money into safe-haven bonds.
• Notably absent from Warsh's explanations were inflation risk, loss of confidence in fiscal policy, or the Fed's own loose policy.

  "The first one was economic growth. We have such a strong economy, we have to pay higher interest rates."

Blame Avoidance and Global Inflation [00:26:00]

• Warsh attributed inflation to global phenomena, citing discussions with other central bankers, to deflect blame from U.S. policy.
• The speaker argues that global inflation stems from similar mistakes: loose monetary policy and large government deficits.
• This shared approach leads to shared consequences of inflation worldwide.

  "Well, the reason everybody else is in the same boat is because we're all making the same mistakes."

Trump's Reaction and Trade Threats [00:30:00]

• President Trump reacted negatively to the rate hike, demanding rates below 1% and threatening to cut trade with deficit countries.
• The speaker calls Trump's threat illogical, as ending trade would harm the U.S. economy.
• Trump's claims of making $1.5 trillion by ending trade are dismissed as a misunderstanding of economics, potentially leading to economic collapse.

  "Interest rates in the United States should be 1% or less because we are the best credit in the world by far, all caps."

Trump's "Communist" Tendencies and Market Manipulation [00:35:00]

• A congressman labeled Trump "communist" for government intervention in markets and taking stakes in companies.
• Trump's belief that he knows better than the market and his desire to manipulate interest rates are highlighted.
• Shorter rates, as Trump desires, would likely cause longer-term rates to rise faster.

  "The U.S. government now has stakes in, that the U.S. government is now buying up companies."

Secretary of the Treasury's Incompetence [00:40:00]

• Treasury Secretary's endorsement of Trump's $5,000 per adult giveaway is criticized as fiscally irresponsible and inflationary.
• The Secretary's claim that this giveaway wouldn't impact the deficit is mathematically impossible and disqualifying.
• This suggests Trump surrounds himself with "yes men" rather than competent advisors.

  "And then the Secretary of the Treasury said, no, I don't think it will have any impact on the deficit. Really?"

Meme Coins and Lack of Understanding [00:45:00]

• The Secretary of the Treasury failed to differentiate between gold and Trump's meme coins, calling both intangible.
• He incorrectly equated the value of stocks and bonds to meme coins, ignoring their underlying business value and income generation.
• The congressman argued that Trump coin is a scam, a Ponzi scheme where Trump profits from buyers' losses.

  "And so first thing he said is like, well, this isn't a Ponzi. It's got nothing to do with a Ponzi."

Political Capital Drying Up for Crypto [00:50:00]

• The Clarity Act for crypto failed in the Senate, indicating drying political capital for the industry.
• Crypto has become highly politicized, with the Republican party being pro-Bitcoin, making Democrats anti-Bitcoin.
• Bitcoin's stagnation suggests it cannot thrive in a favorable environment, let alone an adversarial one post-midterms.

  "And this is an indication that the Bitcoin industry, the political capital is drying up."

Gold as a Safe Haven [00:55:00]

• The speaker advises selling Bitcoin before a potential crash and buying gold as a stable alternative.
• Gold is expected to rise as markets realize the Fed's rate hikes are too small to combat inflation effectively.
• The Fed's inability to fight inflation aggressively without crashing the economy forces them into symbolic, ineffective actions.

  "So soon, gold is going to go up. Bond yields are going to go up together despite the rate hikes."

Panama Conference and Market Volatility [01:00:00]

• The speaker is traveling to Panama for a conference and will observe Yom Kippur services.
• Significant market action is expected in the aftermath of the Fed's rate hike.
• The advice is to be cautious, as "you just might get it" if you wish for a rate hike.

  "But there's likely to be a lot of action in the markets in the aftermath of the Fed's rate hike."