🔴 Fed's Biggest Policy Mistake Yet - Ep 1042

The Federal Reserve implemented a quarter-point rate cut, which, according to the speaker, is not expected to significantly impact the economy. The Fed's focus is on the anticipated trajectory of future cuts, as the market has built expectations for at least two more reductions by year-end. This strategy risks creating a self-imposed corner where failure to deliver expected cuts could be perceived as a hike, potentially destabilizing markets.

The speaker criticizes the Fed's handling of economic data, particularly concerning the labor market. It's revealed that the Fed was aware of potential downward revisions to job numbers, including those boosted by the unreliable "birth death model," yet continued to project economic strength. This inconsistency leads to questions about the Fed's transparency and whether it has been forthright about the economy's true condition.

Furthermore, the discussion delves into tariffs, with the Fed noting their impact on prices but not as significantly as anticipated, and their concern about these price adjustments potentially creating a lasting inflationary psychology. The speaker argues that the Fed's monetary policy, rather than tariffs, is the primary driver of inflation, and highlights the Fed's apparent lack of confidence in its own forecasts, particularly regarding the 2% inflation target which appears to be more of a self-serving goal than an empirically derived prediction.

• The Federal Reserve made a quarter-point rate cut, with market expectations leaning towards at least two more cuts by year-end.
• The speaker questions the reliability of labor market data, including the "birth death model," and the Fed's transparency regarding economic conditions.
• Tariffs are discussed as a factor contributing to price increases, but the Fed's monetary policy is identified as the primary driver of inflation.
• The Fed's inflation target of 2% is scrutinized as a potentially arbitrary goal rather than a data-driven forecast, and its independence is questioned.
• Concerns are raised about housing affordability, the Fed's role in it, and the potential for a government-backed bailout of Fannie Mae and Freddie Mac, drawing parallels to the 2008 crisis.

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Fed Rate Announcement and Market Expectations [0:56]

• The recent Fed rate announcement and press conference were highly anticipated due to expectations of a rate cut.
• A quarter-point rate cut was widely expected, with a 95% probability, and the Fed delivered precisely as the markets anticipated, lowering the federal funds rate to 4-4.25%.
• The speaker notes that the Fed rarely makes unexpected moves like a 50 basis point cut.
• The focus of the press conference was on what the Fed chair said and didn't say.

The Fed's recent rate announcement met market expectations with a quarter-point cut. The speaker emphasizes that the market's anticipation of future cuts, rather than the current cut itself, is what is expected to drive economic impact.

"It's not what we've done, but what the markets now expect us to do."

Fed's Strategy and Market Dependency [3:13]

• The Fed is criticized for building expectations of rate cuts into the market consensus, projecting at least two more quarter-point cuts by year-end.
• This strategy creates a potential pitfall: if the Fed fails to deliver on market expectations, it can be perceived as a hike, potentially causing market instability or collapse.
• The speaker likens this to Wall Street "drug addicts" needing "monetary heroin."
• This dependency creates a dilemma for the Fed, as deviating from expectations could have severe consequences.

The Fed's reliance on market expectations for future rate cuts is seen as a precarious strategy that could lead to significant market turmoil if those expectations are not met.

"The Fed kind of paints itself into a corner where it now sets an expectation that it needs to meet or all hell could break loose."

The Birth Death Model and Data Reliability [08:08]

• The speaker highlights the Fed chair's admission that job numbers receive an artificial boost from the "birth death model," which is based on guesses about new company formations.
• This model can significantly inflate job creation numbers, and the speaker argues it makes the reported job data unreliable.
• The speaker has consistently pointed out the flaws in the birth death model on his broadcasts.
• The Fed chair's admission is seen as a belated acknowledgment of data unreliability.

The Fed chair finally admitted the unreliability of job numbers due to the "birth death model," a point the speaker has long emphasized, questioning why this wasn't addressed earlier when the economy was being presented as strong based on this flawed data.

"He finally admits that the data isn't reliable."

Tariffs and Inflationary Impact [10:00]

• Tariffs are discussed as a factor increasing prices of goods, though the Fed chair noted it was less than expected.
• There's a concern that a one-time price adjustment from tariffs could lead to a persistent increase in prices through a wage-price spiral.
• The speaker argues that the Fed's monetary policy, not tariffs, is the primary source of inflation.
• Tariffs are seen as contributing to inflation by trapping dollars domestically, increasing the domestic money supply, and thus driving up domestic prices.

Tariffs are acknowledged to increase prices, but the speaker contends that the Fed's monetary policy is the main driver of inflation, with tariffs playing a secondary role by increasing the domestic money supply.

"the Fed's way of already blaming higher inflation on tariffs, even though the real source of higher inflation is the Fed's monetary policy."

Tariffs: Who Pays? [13:38]

• The Fed chair stated clearly that foreign producers are not paying the tariffs; they are not reducing their prices to offset them.
• This contradicts claims made by some in the Trump administration that foreign producers are absorbing the tariff costs.
• The Fed has found no evidence of foreign producers bearing the tariff burden.
• The speaker suggests that American importers are currently absorbing the higher costs, but it's only a matter of time before these costs are passed on to consumers.

The Fed has found no evidence that foreign producers are absorbing tariff costs. Instead, American importers are currently bearing the brunt, a situation expected to eventually translate to higher consumer prices.

"He said the data is clear that foreign producers are not paying the tariffs."

The Fed's Dual Mandate and Rate Cuts [12:33]

• The Fed discussed its dual mandate: price stability and full employment, acknowledging risks on both sides.
• Despite potential risks of rising unemployment and inflation, the Fed decided to cut rates, prioritizing the need to stimulate the economy.
• The speaker argues that the Fed's current stance is accommodative, not restrictive, and will likely lead to higher inflation.

The Fed acknowledged risks to both employment and inflation but chose to cut rates, a decision the speaker believes will fuel further inflation, as current policies are viewed as accommodative rather than restrictive.

"And that is why we're going to have higher inflation."

The Fed's Forecasts and Lack of Confidence [22:36]

• The speaker questions the purpose of the FOMC and its press conferences if the Fed has no confidence in its own forecasts.
• The Fed chair admitted that they normally don't have much confidence in their forecasts, especially given current uncertainties.
• This lack of confidence is compared to a weatherman giving an unconfident forecast, rendering it useless for planning.

The speaker criticizes the Fed's lack of confidence in its economic forecasts, questioning the value of the FOMC and its pronouncements when its predictions are so uncertain.

"Yes, they don't have a goddamn clue what's going to happen."

The 2% Inflation Target: A Wishful Goal? [24:07]

• The Fed has a forecast of 2% inflation in two years, despite inflation currently being in the mid-3s and having been above 2% for years.
• This forecast has remained consistent for two years, even though the previous forecast did not materialize.
• The Fed chair admitted that their forecasts are made consistent with their 2% inflation goal, implying it's wishful thinking rather than data-driven.
• The speaker asserts that this "two years to 2%" target is a meaningless mantra.

The speaker argues that the Fed's 2% inflation target is not based on robust forecasting but is rather a self-imposed goal that dictates the forecast, rendering it essentially wishful thinking and a meaningless mantra.

"They only forecast 2% because that's their target."

Redefining "Price Stability" [28:51]

• The Fed acknowledges two mandates: price stability and full employment.
• Price stability has been redefined to mean prices increasing by 2% annually, which the speaker argues is not stability but rather a continuous rise.
• True stability would mean prices remaining unchanged year over year.
• The speaker criticizes the Fed for not aiming for actual price stability and for cutting rates when inflation is already high.

The speaker criticizes the Fed's redefinition of "price stability" to mean 2% annual inflation, arguing that true stability means unchanged prices and that the Fed's current actions contradict this principle.

"Stable means unchanged. So price stability would be the prices we had last year, they're the same as this year."

The Third Mandate: Moderate Long-Term Interest Rates [29:44]

• A potential third mandate for the Fed, "moderate long-term interest rates," is discussed.
• The Fed chair stated this is not an acknowledged mandate and that policy is not based on it.
• The speaker suggests the Trump administration may seek to impose this mandate.
• Achieving moderate long-term rates is linked to low inflation; if the Fed fulfills the price stability mandate, moderate rates would naturally follow.

The Fed chair denies a mandate for "moderate long-term interest rates," but the speaker suggests it could be imposed, arguing that low inflation is the key to achieving this objective, making it a byproduct of the existing price stability mandate.

"But the reality is the only way to really achieve moderate long-term interest rates. And you know what is moderate anyway?"

Housing Affordability and Fed Policy [37:37]

• Housing affordability is identified as a significant problem, with the Fed's past policies being a major contributing factor.
• Low interest rates kept by the Fed boosted housing prices by enabling higher bids and trapping homeowners in low-interest mortgages, limiting supply.
• The speaker predicted this issue would arise due to the Fed's low-interest rate policies.

The speaker asserts that the Fed's prolonged period of low interest rates significantly contributed to housing unaffordability by inflating prices and limiting supply as homeowners were incentivized to stay in their homes due to low mortgage rates.

"one of the main reasons that housing is unaffordable is the Fed."

The Fannie Mae and Freddie Mac Dilemma [41:21]

• The government's proposed solution to housing affordability includes privatizing Fannie Mae and Freddie Mac and potentially offering government guarantees on their debt.
• The speaker criticizes this approach, comparing it to policies that led to the 2008 financial crisis.
• A government guarantee, even if not explicit, effectively makes the debt risk-free for investors, incentivizing further debt and overpaying for homes.

The plan to privatize Fannie Mae and Freddie Mac with government backing is criticized as a dangerous policy that could lead to another financial crisis by encouraging excessive debt and inflating housing prices, mirroring the mistakes of 2008.

"That is an asinine policy, right? That's the kind of policies that created the 2008 financial crisis."

The Market's Reaction and Inflation Hedges [47:16]

• The market reacted positively to the Fed's rate cut, with gold reaching a new record high and gold stocks showing strength.
• The speaker forecasts new record highs for gold, potentially reaching $4,000 by year-end, and $50 for silver, seeing significant upside potential.
• The speaker advises loading up on inflation hedges, particularly non-US dollar investments, foreign stocks, and commodity-focused assets like energy.

The market responded favorably to the rate cut, with gold hitting record highs. The speaker anticipates further gains in gold and silver, advising a shift towards non-US dollar assets and commodities as inflation hedges.

"So, uh, this rate cut and the fact that we're getting two more at a minimum between now and the end of the year. That I think ensures uh smooth sailing for new record highs."

The Fed's Biggest Mistake? [51:46]

• The speaker labels the Fed's decision to cut rates as a major policy mistake, potentially the biggest one yet, given that inflation is rising.
• This decision is seen as locking the Fed into a course of action that will exacerbate inflation.
• The Fed is expected to rationalize rising inflation by attributing it to one-off effects like tariffs.

The speaker views the Fed's rate cut as a significant policy error that will likely lead to higher inflation, forcing the Fed to find ways to explain away the inflationary pressures it is creating.

"I can assure uh everybody that this is a major policy mistake."