Ep 30: FOMC Meeting, Interest Rate Cuts & Inflation (aka Jess Watched The Fed Press Conference So You Don't Have To)

Jess: OK, so apparently today the Fed made an announcement and left rates unchanged, projecting three interest rate cuts by the end of the year.

Jessie: We know that the interest policy affects consumer demand.

Jess: Then you had a post on social media about balance sheets, so I know that you watch the press conferences like a hawk.

Jessie: Could we perhaps do a little refresher on what the Fed does and talk about the current inflation situation? Of course.

Jess: Yes.

Jessie: Was watching like a hawk an intended pun, Jessie? Indeed it was.

Jess: Yes.

Jessie: It was because I'm watching for a hawkish Fed, a dovish Fed.

Jess: Yes.

Jessie: You're listening to Market MakeHer, the self-directing investing education podcast that demystifies the stock market from her perspective.

Jess: We're your hosts.

Jessie: I'm Jessie Dinouye, your guide through the dark shadows of Wall Street.

Jess: My job is to ask the questions you are thinking, and then some, to make it make sense.

Jessie: And I'm Jess Enskip.

Jess: My job is to explain and answer all of Jessie's questions, applying my almost 15 years of experience so close.

Jessie: In July, we'll celebrate, have something, and shed some light on the darkness like a like a ray of sunshine.

Jess: You are the sunshine to my dreary days, and I can't wait for you to illuminate me with some monetary policy knowledge.

Jessie: But first, so we received a very lovely message from Kevin, a dad of two girls.

Jess: Kevin said, wanted to say thank you because I have 10 and 12 year old daughters and we listen to your podcast in the car.

Jessie: I'll support them in any career path, but I want them to know personal finance.

Jess: I want them to be comfortable no matter what career path they choose.

Jessie: Your podcast helps start great discussions and makes them excited to save.

Jess: It's great for them to have other women to look up to.

Jessie: Thanks again.

Jess: It's very, very sweet.

Jessie: It really is.

Jess: It gets me.

Jessie: I mean, you hearing you read it again, gets me teary eyed again, you know.

Jess: Yeah, so I'm a mother.

Jessie: I have a 13 year old son, believe it or not.

Jess: And Kevin, we appreciate you taking the time to send us that note.

Jessie: And if we had the ability to give you father of the year for having those investing conversations with your littles, we would totally do that.

Jess: But what we can do is we want to have a special episode that's dedicated to you and your girls, but also that our listeners could utilize as well because those type of conversations are really, really important.

Jessie: So if they have specific questions, send it our way.

Jess: And if our listeners have specific questions, send it our way.

Jessie: Talk to your kids.

Jess: What do they think about finance? You know, Jessie, I was telling you that I gave a presentation to 150 eighth graders and I had them write down questions.

Jessie: So I actually have 150 note cards with their comments.

Jess: Yes.

Jessie: So we can go through those, maybe make like a little worksheet, but something to help you have those conversations if you haven't, like Kevin.

Jess: It will be epic.

Jessie: So excited.

Jess: And thank you, Kevin, for sending that message.

Jessie: Literally those make late nights really, really worth it.

Jess: Yeah.

Jessie: I think it's important to get kids in the right mindset.

Jess: I wish I was listening to a podcast like this when I was 10 because I would probably be retired by now.

Jessie: Oh, that'd be great.

Jess: All right.

Jessie: Let's talk about the Fed, a.k.a.

Jess: Papa Powell, and why understanding the Federal Reserve is crucial for anyone interested in the stock market.

Jessie: This is a little bit refresher.

Jess: We've talked about this once before in a stock market update, but we'll talk about it again.

Jessie: So who is the Federal Reserve? Yes.

Jess: Let's go into detail.

Jessie: Maybe a rabbit hole, Jessie.

Jess: Who knows? I love rabbit holes.

Jessie: We'll see where this journey takes us.

Jess: It could be the Wonderland.

Jessie: Yes.

Jess: So Federal Reserve, a.k.a.

Jessie: the Fed, FOMC, Federal Open Market Committee, it is a committee of people.

Jess: I always forget what that stands for, Federal Open Market Committee.

Jessie: Yes.

Jess: Federal Open Market Committee.

Jessie: There's a Fed chairman, which is Sir Papa Jerome Powell, the Fed.

Jess: They're basically the central bank of the United States.

Jessie: Their role is managing the nation's monetary policy, supervising, regulating banks, financial stability, providing banking services to literally the reserves, so depository institutions.

Jess: Even the U.S.

Jessie: government, there's a lot that they do within monetary policy.

Jess: That's who they are.

Jessie: When you say monetary policy, is that laws or rules around how we spend money? That's where the Fed's job comes in.

Jess: They have a dual mandate, and you can go on their website and read all about them.

Jessie: Their job is maximum employment and price stability, and it's a balancing act.

Jess: It's not a science.

Jessie: It is more of an art.

Jess: They have to make sure that prices are stable so inflation doesn't cost too much for you to rent your house, to buy your groceries, all of your necessities as well as your luxuries like travel and hotel costs.

Jessie: They make sure that that's all stable, but also everyone is employed.

Jess: Maximum employment and stable prices, and that in the long run is really supportive of a healthy economy, which is us, we're the economy consumers and producers.

Jessie: How does the Fed do that? What's the Fed's toolkit? They have three tools at their dispense in order to meet those key objectives and support a healthy economy.

Jess: Again, key objectives, maximum employment, stable prices, price stability.

Jessie: We talk about this one the most, which is the interest rate policy.

Jess: That's where they adjust the federal funds rate, which is the rate at which banks borrow, and they have deposit requirements that are also set by the Federal Reserve.

Jessie: They raise the Fed funds rate, then it's going to cost more to borrow, but it really takes time to go through the system.

Jess: If you watch the episode where we were talking about the inverted yield curve and how it reacts, the Fed's actions are affected by the front end of the curve, which is just shorter term debt.

Jessie: I feel like I'm getting too deep real quick.

Jess: The point is they raise interest rates and it has this immediate domino effect.

Jessie: The domino effect is it's going to cost more for your credit card interest rates because it costs the banks more, it's going to cost more for your mortgage, it's going to cost more for you to borrow money, and that is on consumers as well as businesses too.

Jess: There's this huge impact that occurs, good and bad.

Jessie: It makes the cost of capital more expensive and the Fed can only tackle demand side.

Jess: There's less demand because you're really going to have less money in your pockets because if you have credit card debt, now it's going to cost you more to carry that debt.

Jessie: It used to be where even in mortgages, so back to the 2008 great financial crisis, more mortgages were on that floating rate, so as soon as they start raising interest rates, people already had houses they couldn't afford.

Jess: They really couldn't afford it when the Fed started raising interest rates and that was part of what contributed to the bubble.

Jessie: That's not the case anymore.

Jess: Most people have fixed interest rates, which leads to other issues, but it has an impact on borrowing, which then has an impact on spending and if you don't spend as much, because the definition of inflation is too many dollars chasing too few of goods and companies are absolutely greedy.

Jessie: That is the definition of inflation.

Jess: They raise prices and if you are willing to pay it, they will keep it there.

Jessie: When we talk about the federal funds rate, what does that mean? What are the federal funds, just like the money going into the economy or the amount of money the US is allowed to borrow? That's a piece of it.

Jess: They control monetary policy, so there are reserve requirements, so the Federal Reserve, literally in the name.

Jessie: There is the federal requirement for a bank.

Jess: They have specific cash requirements that they have to have on hand.

Jessie: The Federal Reserve.

Jess: Yes.

Jessie: They have to keep those on hand.

Jess: Those are the Federal Reserve requirements.

Jessie: They report back to it.

Jess: That's what's required from them.

Jessie: If they don't, then they borrow from the Federal Reserve and the Federal Reserve sets that rate at which they borrow to meet those capital requirements.

Jess: You're saying the government borrows from the Federal Reserve? The way that the government borrows is through the treasury and the treasury issues debt, sovereign debt, treasury bills.

Jessie: Which is our funds.

Jess: T-bills.

Jessie: This is our T-bills.

Jess: Yes.

Jessie: That's coming together a little bit more now.

Jess: They adjust these federal funds to influence economic activity, and that's what has an impact on us, the consumer, borrowing, which then affects the way we spend money, and that's what can drive or lower inflation, essentially, because if we're spending a lot of money or we're demanding more with the money we want to spend, then the cost of those things we want to spend money on is going to go up, and that's what inflation is.

Jessie: Exactly.

Jess: Yes.

Jessie: So, the Federal Reserve adjustment, they left the rates unchanged.

Jess: We're talking about the Federal Reserve rates? That's right.

Jessie: The Fed funds rate.

Jess: We're back in this hiking cycle, is what we call it.

Jessie: So when the Federal Reserve is cut to zero, it's because usually there's been some sort of crisis or recession or pandemic or whatever, right? Stay with us.

Jess: We'll be right back.

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Jessie: We'll see you there.

Jess: See you then.

Jessie: In a way, yeah, because it's their toolkit.

Jess: So their job is price stability and maximum employment.

Jessie: And those go hand in hand, but it's really an art and a balancing act.

Jess: So when they raise interest rates, normally, it's not happening this time, normally that's going to cause a spike in unemployment as well.

Jessie: Because you raise interest rates, then companies are going to protect their profit margins as much as possible.

Jess: That's going to give them indication they've raised their prices as much as they can.

Jessie: Now they can't raise their prices because people aren't willing to spend.

Jess: If they're not, we have to look at the data.

Jessie: Then they would cut their expenses, which is employees, which raises the unemployment rate.

Jess: But what the difference is here from our current environment, from where we came from, I'm talking post-2008, if we have interest rates close to zero and there is a spike in unemployment, the Fed doesn't have a toolkit to help with that.

Jessie: But now, I mean, they have other policies, but the biggest one is that interest rate.

Jess: But if there was a spike in unemployment or some type of crisis, like during COVID, that's a great example, that they brought it down to zero or really close to it to spark economic activity and they sure did.

Jessie: Housing boom went crazy.

Jess: We got lower interest rates again for a short period of time.

Jessie: So it has an impact on borrowing.

Jess: So it's a toolkit to spark economic activity or slow it down.

Jessie: They want 2%.

Jess: That's the goal that Papa Powell keeps saying.

Jessie: I think that's a little low and we'll see, but they don't want it to go too far too fast.

Jess: Right.

Jessie: So it's at around 5% now.

Jess: They can't just drop it down to 2% because that would cause some crazy rifts in the economy, basically.

Jessie: So let me clarify myself.

Jess: They want 2% inflation year over year.

Jessie: And right now we're at 3.2% and the Fed funds rate is at 5.25%.

Jess: Is that what's reflecting our like high yield savings account interest rates and things like that? Yeah, absolutely.

Jessie: Because their actions impact the front end of the curve and the front end of the curve is short term treasury bills and things like that.

Jess: And do you know what money markets are made up of? Short term treasury bills.

Jessie: So if they affect the front end, and it's just a piece of what's in money markets, just a lot more.

Jess: But if they affect the front end of the curve and they raise the interest rates there, that's how you get more money on your money.

Jessie: So there's some good that comes with it.

Jess: The wealth effect comes into play, but then it costs more to borrow.

Jessie: It is huge trickle down effect.

Jess: It's an art and a balancing act, not science.

Jessie: Right.

Jess: And that's why we call it a balancing act because they're trying to balance all these things to not tip the economy all the way into a recession.

Jessie: Exactly.

Jess: All right.

Jessie: Well, that's toolkit number one.

Jess: We got to go to number two.

Jessie: Oh, that was all the first part of the toolkit.

Jess: Okay.

Jessie: So interest rate policy was the first part of the toolkit.

Jess: What's next? More guidance.

Jessie: So this is something new that they've done is they have this press conference where they announce what they're going to do.

Jess: There's a speech, we analyze the words, and then there's a Q&A and it's super helpful.

Jessie: So what happens is they're being transparent.

Jess: And the reason why they're being transparent is because then the markets will start doing the work for them.

Jessie: Because remember, the market is what? Forward looking.

Jess: Yes.

Jessie: Oh my God.

Jess: Thank you.

Jessie: It is.

Jess: So it's always trying to figure out what things will be worth.

Jessie: So if the Fed comes out and says, we're going to raise interest rates, immediate reaction from the market, immediate reaction.

Jess: If it's negative, you'll see yields go up, stock market go down, all the tech will immediately plummet when that first indication is there.

Jessie: But now if he's been talking to us constantly, that's what we got today, and the markets immediate react to the information that's there.

Jess: That's why you analyze it like a Swiftie.

Jessie: But that has more effect really on the market as of late than even his decisions because it's, okay, here's where I see the economy going.

Jess: Here's where I see unemployment is.

Jessie: Here's what I need to see to cut interest rates.

Jess: And we'll talk about that in a little bit.

Jessie: So they have to be very careful with their diction, very choosy with the words they use, what they say.

Jess: Yes.

Jessie: Because now I do want to watch it because I want to see how careful he is with his words or how choosy and what he says.

Jess: It's really interesting.

Jessie: It's very well planned out and thought out.

Jess: It is.

Jessie: He's doing a great job.

Jess: I really, really am impressed with this guy.

Jessie: Remember it's a committee.

Jess: He's the chair.

Jessie: He's going to answer the Q&A because he's the guy ultimately the head of it all.

Jess: But there's also other people and they'll come and speak throughout the week even.

Jessie: So it's not just the press conference that is when they announce the interest rate decision like they did today.

Jess: You'll have other people go in, but then what will happen is you'll designate all of the people on the Fed and you'll say, okay, this person is hawkish, this person is dovish.

Jessie: Hawkish means raise interest rates higher.

Jess: Dovish means they want to cut rates.

Jessie: And so it's interesting to get their perspective and that will make markets react as well.

Jess: So the second part of the toolkit is this forward guidance, which just means like word of mouth and what the Fed says.

Jessie: And that is a communication strategy about the future path of monetary policy.

Jess: Okay.

Jessie: So that has a big role in shaping expectations of market reactions and that's why it's a tool because it does affect what happens.

Jess: So then what would the third tool be that they have in their toolkit? So this one we have not talked about yet, I don't believe.

Jessie: And he mentioned his balance sheet today.

Jess: So it's called quantitative tightening and quantitative easing.

Jessie: There are securities that they hold on their balance sheet.

Jess: Think of that as the Fed's portfolio.

Jessie: They have a portfolio of mainly fixed income products.

Jess: Their balance sheet is their portfolio.

Jessie: So they're just keeping an eye on this balance sheet.

Jess: Well that's their other tool.

Jessie: The market is a function of supply and demand and is forward looking in every aspect.

Jess: And hopefully that all makes sense to our listeners so far because you've made it to episode 30.

Jessie: So when they have this balance sheet, it's called quantitative tightening and quantitative easing.

Jess: So when we started this hiking cycle last year, which is crazy that it's been this long.

Jessie: Or has it been two years? Oh my gosh, it's been two years.

Jess: It's been two years.

Jessie: We started this hiking cycle two years ago and they began quantitative tightening.

Jess: They weren't buying securities anymore, but they were letting fixed income products just roll off their balance sheet, meaning they expired or they reached their maturity date.

Jessie: They kept that cash, but they did not go buy more securities.

Jess: And that takes away liquidity from the bond market is what we call it because they were a big piece of the demand equation and they stepped out.

Jessie: So is that portfolio part of the Federal Reserve? Yes it is.

Jess: It's their portfolio.

Jessie: So they're buying up certain like fixed income properties or certain bonds and things to keep that in the Federal Reserve.

Jess: Is that a way of keeping some of the supply and demand in check too? It is.

Jessie: It is a toolkit.

Jess: It is a toolkit.

Jessie: Let's focus on easing first before tightening.

Jess: So they use that to stimulate the economy because that creates a money supply.

Jessie: If they're purchasing government bonds or things like that, that's injecting money directly into the financial system because then banks can borrow from the Federal Reserve.

Jess: If they can borrow from the Federal Reserve, you can borrow from the banks.

Jessie: Ah, okay.

Jess: So that's how it increases money supply.

Jessie: So when people say the Fed is printing money, they're not physically printing money.

Jess: What they're doing is they're buying securities and that helps boost economic growth because they're creating money that way.

Jessie: When they're buying those securities, they're like giving money to these like banks and things essentially.

Jess: Well, banks have access to more money.

Jessie: So this is where the trickle effects come in.

Jess: If you have quantitative easing, you might have a loosening credit requirements.

Jessie: So right now it's in a tight credit environment where the credit is tightening is what we call it.

Jess: So if it's easing, it would loosen.

Jessie: The opposite would happen.

Jess: So people are more easily able to get credit cards or loans or whatever.

Jessie: Exactly.

Jess: But you don't make money out of thin air, but this is the way it occurs.

Jessie: So the Fed would buy those securities.

Jess: That creates money that the Federal Reserve has.

Jessie: Then banks can borrow against that money.

Jess: And then the Federal Reserve sets leverage requirements that those banks can have.

Jessie: So they may borrow against that and they can only leverage it 20 times or however many times to give you credit.

Jess: So that's how money is created.

Jessie: Interesting.

Jess: Yes.

Jessie: So very, very deep in the rabbit hole today.

Jess: It is, but it's good to know because I mean, it affects everything we're able to do as individuals too.

Jessie: It really does.

Jess: More people are able to borrow, less people are able to borrow, how that affects economies.

Jessie: People can't get small business loans.

Jess: I mean, there's so much that can go into it.

Jessie: That has every bit to do with this.

Jess: I love that you said that because right now when we're looking at the market and trying to understand broader participation.

Jessie: So total tangent, but related.

Jess: Last year, the stock market was all about AI and the Magnificent Seven leading it because they were the big market cap, like we talked about last episode.

Jessie: And this year we're looking for broadening out because small businesses took a hit.

Jess: Smaller cap securities as measured by the end to see the Russell 2000 is what you could look at.

Jessie: And that's moving up.

Jess: And that's telling us that small businesses are doing better because that is what takes the hit with monetary policy.

Jessie: Unfortunately, it is smaller business and it is the less fortunate low income as well where it's really difficult.

Jess: But inflation is also worse on them as well.

Jessie: And he always acknowledges that in every speech.

Jess: He says, I know this hurts these people the most, but he says, I also know that if inflation was at 9% it would hurt them even more.

Jessie: And it really is a balancing act in every aspect.

Jess: And where your mind went is exactly how this is affecting it.

Jessie: Interesting.

Jess: Exactly.

Jessie: Yeah.

Jess: It's all like, it all kind of makes sense now.

Jessie: There's so much that goes into everything.

Jess: It's crazy.

Jessie: Okay.

Jess: It is.

Jessie: So tightening, quantitative tightening is just the opposite.

Jess: So easing is we're buying, tightening is we're selling.

Jessie: So we're going to reduce the money supply in the economy.

Jess: And that's the intent of a restrictive Fed.

Jessie: When we say a restrictive Fed, that means, all right, let's get credit tight.

Jess: We don't want necessarily a credit crunch.

Jessie: We want credit tight.

Jess: So it's difficult to borrow.

Jessie: If it's difficult to borrow, it's going to be difficult to spend.

Jess: If it's difficult to spend, then companies aren't going to be as greedy and raise their prices and will moderate inflation.

Jessie: Those are the three Fed tools.

Jess: Interest rate policy, word of mouth, and their ballot sheet.

Jessie: Are they buying and selling securities, QT and QE? Yes.

Jess: Quantitative tightening, quantitative easing.

Jessie: Okay.

Jess: Didn't know about, you know, most of that.

Jessie: But when we talked about some of it in the past, I didn't understand what the balance sheets were.

Jess: So that helps.

Jessie: And you said that they're projecting three interest rate cuts by the end of the year, right? That's the 5% that we're looking at is going to get cut, which is the part that trickles down into our high yield savings accounts, interest rates potentially getting cut too.

Jess: Yes.

Jessie: So there's a tool that you can even use to see how the market feels about it.

Jess: It's called the CME Fed tool.

Jessie: You can just search it up.

Jess: Click on probabilities.

Jessie: It's a tool? It is a tool.

Jess: Tool time.

Jessie: Don't eat this.

Jess: Jingle.

Jessie: CME Fed tool.

Jess: Okay.

Jessie: Click on probabilities.

Jess: Okay.

Jessie: May 1st is our next meeting.

Jess: There's an 89% chance that it's going to remain at 5.25% to 5.5%.

Jessie: So that's 5.25%? Mm-hmm.

Jess: That's right.

Jessie: Is that like basis points or whatever? Yes, it is.

Jess: Okay.

Jessie: Why can't they just say 5.25% to 5.5%? They should.

Jess: But then you'll see the first rate cut is projected to actually be in June.

Jessie: So June 12th, there's a 67% probability that it'll go to 5% to 5.25%.

Jess: Oh, I see how this works now.

Jessie: Okay.

Jess: So it's 67% chance that in June it'll be the same.

Jessie: In June it will actually go down by a quarter.

Jess: Oh, by a quarter, right.

Jessie: And there's like a very small chance it could even go down lower to like 4.75% to 5%.

Jess: Right.

Jessie: Exactly.

Jess: Okay.

Jessie: So that's the market's interpretation of what the Fed is going to do.

Jess: Sometimes we say the market and the Fed are out of balance.

Jessie: This is a tool to utilize to look at that.

Jess: This changes all the time because the Fed is going to look at everything meeting by meeting and they are data dependent.

Jessie: He likes to tell us that all the time.

Jess: Okay.

Jessie: You still have to take this data with a grain of salt because it can change at any time basically.

Jess: Sure can.

Jessie: Just like the market can change at any time.

Jess: But this way you got to understand how it all works and then it gives you more insight Back to what's happening now though.

Jessie: The Fed committee gets together.

Jess: So they tell us, we call it the dot plot, which just means where do you think there will be interest rate cuts going forward? It is not a plan.

Jessie: It is not a map.

Jess: It is just a thought and it can change with data.

Jessie: Their view because they're data dependent.

Jess: The thought is the dot plot? Yes.

Jessie: The thought is the dot plot is what we call it.

Jess: The dot plot is just thoughts around what's going to change, what could potentially happen.

Jessie: Yeah.

Jess: Yeah.

Jessie: Because like, so imagine the whole Fed committee is there and they're like, okay, where do you think interest rates will be in 2024? 4.5.

Jess: Okay.

Jessie: A little dot on 2024 and 4.5 and then everyone else goes around and then wherever the most dots are.

Jess: And can we see their dot plot? Yeah.

Jessie: Okay.

Jess: So according to the latest, they expect 0.75 percentage points, 75 basis points, 75 BPS.

Jessie: So synonymous there of cuts in 2024.

Jess: So it's expected that they'll probably do a quarter each time they cut.

Jessie: This dot plot is more confusing to me than the other thing I looked at, the CME.

Jess: I agree.

Jessie: I agree.

Jess: I say just stick with the CME FedWatch tool because there we go.

Jessie: What's updated more? The dot plots or the? The CME tool is based off of the futures market.

Jess: The dot plot is given by the Fed.

Jessie: They literally did that today in their meeting? Yes.

Jess: Okay.

Jessie: The CME FedWatch tool, since it's based off of the futures market, which means it just gives us probabilities, is the market's reaction to everything the Fed said.

Jess: Okay.

Jessie: Would not go crazy going down that rabbit hole.

Jess: Yeah.

Jessie: It's interesting to know that.

Jess: For sure.

Jessie: Let's get into today.

Jess: I literally think we should get Powell friendship bracelets.

Jessie: Hey, WWPD, what would Powell do? You know, just all these.

Jess: I think we need to watch this man more in action and see how I feel about him.

Jessie: But I mean, I trust you.

Jess: So yeah, sure.

Jessie: Why not? Papa Powell.

Jess: You know, Papa Powell would be a good one.

Jessie: Maybe that would be the first merch we sell is Powell friendship bracelets.

Jess: And I'm bringing in Taylor Swift there.

Jessie: I know you got it.

Jess: And it's hilarious to me because I watched it on CNBC and I think Steve Leisman does the best job interpreting it.

Jessie: He's like, today he said, continued.

Jess: That's new language from before.

Jessie: I'm like, just send the Swifties.

Jess: Just send them.

Jessie: Just have a committee of Swifties help decode it all.

Jess: They'll figure it out.

Jessie: They really will.

Jess: They really will.

Jessie: Figure it out before the Fed even knows what they're going to do.

Jess: So Swifties, if you're listening, here are my notes from today's Fed discussion, if you will.

Jessie: So they kept rates unchanged.

Jess: They'll anticipate three cuts by year end.

Jessie: They said that the economy has made considerable progress when considering the data.

Jess: When we say the economy, they mean GDP is going up.

Jessie: They even revised their forecast for GDP to be even higher.

Jess: So they expect growth and they do not expect unemployment to go crazy, which is interesting.

Jessie: So that is definitely a strong economy when considering the data.

Jess: He said inflation is still high, but it's not the Fed's long run target of 2%.

Jessie: And they are committed to keeping it to 2%.

Jess: This is his line.

Jessie: The path forward is still uncertain and we remain to be data dependent.

Jess: So always uncertain paths, but we'll rely on the data.

Jessie: Great.

Jess: He always does that.

Jessie: Always.

Jess: Always.

Jessie: Like his little closing.

Jess: He's like catchphrase, slogan.

Jessie: He's got some of that, yeah, but it's always we're committed to 2%.

Jess: The journey is unstable, but he did say that we've reached peak policy rate, which means he doesn't forecast going any higher, which is good to know.

Jessie: Yeah.

Jess: I definitely think we're seeing the lag effects more so now, and I know the market's been doing great and it's been up and all the things, been seeing a lot of layoffs this year.

Jessie: Yeah.

Jess: So I can see some cracks.

Jessie: He was asked that question today and he said he did not see cracks in the unemployment picture, which I thought was really interesting because I feel like TikTok gives you more insight than anything.

Jess: Yeah.

Jessie: Because people, us, like the real people, are being like, hey, we're getting laid off.

Jess: It's hard to find jobs.

Jessie: But if you think about how that is, if those people aren't applying for unemployment and they have a side hustle or other means of income, then the Fed's going to be like, everyone's employed.

Jess: I believe in Papa Powell.

Jessie: It's just the way that the data is calculated.

Jess: You are not counted in unemployment unless you applied for unemployment and then a look for continuing claims.

Jessie: Who is continuing to still be on unemployment? If you got a severance package, you can't get unemployment, right? Yeah.

Jess: And that might be why.

Jessie: And that's why tech jobs didn't really show up.

Jess: Right.

Jessie: Because there was big severance packages.

Jess: That makes sense.

Jessie: Right? Which is something you have to account for.

Jess: Back to what he's saying though.

Jessie: So Fed's dual mandate, he said he was sticking to restoring price stability and he says it is essential for an unemployment picture that benefits us all because he recognizes that employment is part of his dual mandate, which we appreciate.

Jess: But what he mentioned today was his balance sheet runoff, which is an idea easing that he has not before.

Jessie: And what was really interesting is there was questions about January and February data that was hotter than expected inflation prints.

Jess: And he said when looking into that altogether, he said February wasn't as bad as January.

Jessie: We're still on the path to bringing inflation down.

Jess: Still on the path to 2% so it's going to be a bumpy road.

Jessie: That happens.

Jess: And he basically called it a non-issue.

Jessie: And I think that's why the market rallied.

Jess: Definitely rallied today.

Jessie: I see.

Jess: When he talked about the balance sheet runoff, he was talking about the stress that it would have on money markets.

Jessie: He's recognizing concern or it's in anticipation of money market stress, but this is that transparency that he's bringing in.

Jess: And he was like, hey, this happened before, I believe it was in 2019, where he had to start quantitative easing because of the effect that quantitative tightening had on money markets.

Jessie: And if there's money market stress, he wants to prevent that.

Jess: And I believe in him because we did have a banking crisis, Silicon Valley Bank, and they fixed that on a weekend.

Jessie: Yeah, that's true.

Jess: So we'll see what happens.

Jessie: I really love this guy's transparency, is when he was talking about the January and February data, he was like, okay, this could be seasonal.

Jess: I'll look it all together.

Jessie: Still on that path.

Jess: The road's going to be bumpy.

Jessie: But then he talked about last year.

Jess: Last year, we had like seven consecutive or maybe nine months of really good data.

Jessie: Inflation coming down.

Jess: But he didn't celebrate.

Jessie: It's like, I'm not going to overreact to anything.

Jess: He's really got some really high IQ skills, come to think of it.

Jessie: So he doesn't overreact to the good data, and he's not overreacting to the bad data, which allows him to not freak out when there's bad stuff.

Jess: And I'm like, yeah, some lessons there.

Jessie: But he said they're not ignored.

Jess: He said, but I do not ignore them.

Jessie: I'm like, okay, all right.

Jess: He did mention employment.

Jessie: So what's interesting, when we talked about in the beginning of the episode, is normally when the Fed raises interest rates, it's the Fed's actions that tip us into a recession and leads to a spike in unemployment.

Jess: So this dude is really sticking to its dual mandate.

Jessie: You know, a lot of it's the savior.

Jess: That is AI.

Jessie: But he said that employment's coming back to balance because there's more labor market participation, and that is from the younger generation.

Jess: But we also have increased immigration, and that is helping our economy a lot and our employment picture.

Jessie: And what is very, very interesting about that is past cycles, we would say, okay, chairman, how much unemployment do you think we're going to get before you feel comfortable cutting rates or, you know, stimulating the economy again? And he said, none.

Jess: Like, I'm sure it's going to stay where it is.

Jessie: And what he did say is if he does see this unanticipated increase in unemployment, then he's ready to use his toolkit he's now created and start cutting rates.

Jess: So we got an indication of what he will do.

Jessie: And then on top of that, with the Q&A, love the Q&A, he is totally acknowledging that the housing market is coming down in prices.

Jess: And he's confident that rents are going to come into the data, and that will show up over time.

Jessie: He doesn't know the timeframe, but that's what's going to get him to his 2%.

Jess: If you ever heard the saying, or I say it a lot, is good news, good news, or is good news, bad news, or is bad news, good news? That's what we're looking at, is like, oh, is a spike in unemployment good news? And in this case, it might be, because it means the Fed's going to cut rates.

Jessie: If the Fed cuts rates, then the market's going to go up, as long as GDP's still up.

Jess: Now he's like, listen, I got some cushion.

Jessie: I can ease, because the labor market is strong, and growth is still here.

Jess: GDP is up, and everyone has a job from the data.

Jessie: Say that again, from the data, that he sees that as his cushion.

Jess: And then last thing I'll say about his balancing act and what he said today, the Fed thought that inflation was transitory when COVID happened, and they did not raise rates fast enough, and then we got inflation super, super high.

Jessie: I think in the long run, it ended up being transitory, because it was all like supply chain issues, because of like China and everything shutting down.

Jess: Nonetheless, his worry now is if he holds rates too high for too long, that could be super bad.

Jessie: But if he lowers it too early, then inflation could resurge, and that could be bad.

Jess: So, it really is an art.

Jessie: Yeah.

Jess: You can tell that Jess is real into this, because if you follow her on TikTok, at Jess Inskip on TikTok, you can see her little PowerPoints that she does for fun on there..