We discuss the latest insights on the Fed’s rate sentiment and its impact on the market. Are investors prepared for potential rate changes? Tune in as we break down market reactions and investor strategies.
Wall Street Journal Articles
https://www.wsj.com/economy/central-banking/the-feds-conundrum-interest-rates-are-both-too-highand-too-low-f05a9d3a
Connect with Bob Fraser on LinkedIn https://www.linkedin.com/in/bobfraser10/
Connect with Ben Fraser on LinkedIn https://www.linkedin.com/in/benwfraser/
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Transcription
Ben Fraser: Welcome back to another episode of the Invest Like a Billionaire podcast. I’m your co host Ben Fraser, got fellow co host Bob Fraser on the line today. Juicy news, the fed just released their sentiment on rates just a few days ago and the market soared. But if you dig in a little bit more, maybe it’s not exactly all rosy just yet.
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What were some of the announcements and what’s the market thinking right now?
Bob Fraser: The big thing everybody was waiting on is the dot plot and the dot plot shows, most of the, uh, the board there believe that interest rates are going to be cut three times this year.
So 75 basis points and it’s not very changed from what it’s been. And to go back to, a few weeks back, we talked about the anticipation of the market. An interest rate expectation of the market has been completely wrong. From what has actually happened.
The market continues to believe we’re going to see more aggressive declines in interest rates in this season. And in past seasons, they’ve just been, the markets have just been very raw. And again, our view is that inflation is just a little bit stickier than people want it to be and jobs, the economy is a little bit stronger, than we, than they want it to be.
So job, the job market is very strong and we’re, we continue to see that we’re seeing a little bit of softening in the job market. We’re seeing a little bit of easing of inflation, but it’s not that, it’s not as much as people want. So the market had dropped in anticipation because of all the strong economic news and higher inflation news that the Fed was going to change their stance and nothing really changed.
So then the market immediately takes off but it’s really Yeah. Thank you. Unchanged and the market is probably going to be wrong. I think my view is, I was going to not drop this year or drop a little bit, maybe 25 basis points. Maybe two, but I doubt it.
Ben Fraser: Yeah. And what you’re referencing is a podcast or just a few weeks ago where. We found some really interesting data that overlaid what the kind of forward curve expectation of interest rates was going to be at different points in history, overlaid with the actual interest rates. And just in about every case they were wrong, right?
And so it’s just important to remember, right? This is the market from our perspective, holding on to the hope of low interest rates of yesteryear and getting back to the normal that we got used to. And. If you’ve been following any of our economic content for a while, we believe that inflation is still going to be sticky.
It’s going to be stubborn to get back down to that 2 percent level that the Fed has been holding. Are too. And what you’re saying is the market is off because the expectation was, we’ve been seeing some numbers on employment, on GDP growth come out recently, and they were all higher than expected, right?
It was like lower unemployment and higher GDP. And so the market was getting a little bit nervous that, Oh man, maybe the feds are going to change their stance. And as of now, they’re not, but Jerome Powell is into the talk he just gave, he said, Hey, this is data we don’t like. So we can’t just dismiss it.
He’s admitted that inflation has been stickier than anticipated over the past few months. They’re expecting inflation to decline, but it’s going to be bumpy. And they don’t know if those bumps are the actual trajectory or just a short term reversal. And there still is a lot up in the air where it really normalizes.
And if you look at the dot plot, it’s basically what are the expectations from different members of the Board of the Federal Reserve. And they share where they think rates are going to be. If you look at the Dow plots, they have low, medium and high expectations. We’ll put some of these links in the show notes.
It’s a huge range on the high end. It’s like maybe. 25 to 50 basis point cuts over the year on the low end. It’s a significant several percentage point cut. It just, again, tells you there’s not a clear consensus. There’s not a strong expectation yet of knowing where we’re at.
We know exactly where we’re going to go. And so again, this is a continuation of the same theme, but investors need to prepare for rates to be higher for longer. And I think that is. If you prepare that way and if you use that as the baseline, then if they go down significantly, then, Hey, we all benefit.
But I think holding on for hope in the short term, the rating rate decreases. That’s going to massively change everything is really unlikely because even if there are three rate cuts, does somebody have basis points like that? That impacts things quite a bit. It just went up, not really a hundred basis points late game, right?
Bob Fraser: Yeah.
Ben Fraser: Yeah. So there’s still a lot to unpack here and to see as it plays out and that’s why all eyes are on the feed. But our perspective is, don’t hold your breath. And continue to pay attention to what the Fed’s saying because they’re not conceding at this point, right?
It’s not baked in.
Bob Fraser: No. And I still think in election year I think they’re not going to be one accused of playing politics. I think it’s a question if they reduce rates before the election, November. Um. And I think the risk is still to the upside that what if they reduce rates and then inflation starts ticking up again and the strength of the economy and the resilience of the inflation data points out that could happen.
And so the Fed is just, they’re going to be slow to move. They don’t want to start easing and then have to start raising again. All those things point to caution and we’ll see where it goes.
Ben Fraser: We’ll see. But it’s probably a good chance that it’s not going to happen exactly as people expected it to be right now based on historical data.
So we have confidence in that. And maybe it’s not as dramatic as maybe we’re even saying. But again, I think it’s important to be cautious for significant rate cuts. I shared it the other day, I was listening to some economists that were expecting like five or six rate cuts this year, like significant reduction.
And it’s just, I just, I think that’s too early to start getting excited about that and to make decisions based on that information. So yeah, with that, hopefully, Hey you’re tracking along and this is helpful and we’ll put some links to the show notes for some other Podcast we’ve done recently on this topic because it’s a continuation of some of the things we’ve been saying and seeing and it’s important to pay attention with what the Fed is doing and understand where the trajectory of trends are going But again, we, you got to make long term decisions and understand the long term trends, not just these short term reactions, because things could change very quickly and the Fed can change their tune very quickly too.
This is not baked in. So I appreciate you all listening. Hope you enjoy the episode. Be sure not to miss an episode, hit the subscribe button make sure you rate, review, share the frame. We appreciate all that and love our listeners. So thank you guys.
