Hey guys, it's Sasha Yesterday, the Federal Reserve increased interest rates by a quarter of a percent to a new range of 5.25 to 5.5 percent. And we now have a very serious problem because back in June the FED paused rate hikes and said that this was because they needed to see more data. What incremental information will the committee be using to inform their judgment on whether this is in fact a skip or a longer pause? Well, I think you're adding that to the the data that we've seen since the last meeting too. You know we, since we chose to maintain rates at this meeting is it'll really be a three-month period of data that we can look at I think that's a full quarter and I think you can.

You can draw more conclusions from that than you come from any six Any six week period, We'll look at those things. We'll also look at the evolving risk picture. We'll look at what's happening in the financial sector. We'll look at all the data, the evolving Outlook and we'll make a decision.

So here we are, six weeks later and more data has indeed turned up. Inflation in the United States fell from four point zero percent to three point zero percent. A full one percent drop in just one month and the date of the last Fomc meeting. The expectation was that inflation would only drop three point seven percent.

so the drop was more than three times as much as expected. Core Inflation the measure that the FED apparently prefers fell from 5.3 to 4.8 And remember that core inflation is an incredibly skewed number. Because 44 of core inflation is shelter. the price of renting or paying your mortgage, almost half of the core inflation number is just shelter and shelter is a lagging indicator.

It's lagging because if you own a house on they say 30-year mortgage and the FED goes and increases interest rates. It doesn't affect you whatsoever. Your monthly payments do not increase. You keep paying exactly the same amount until you have to move house or remortgage for whatever reason.

So while the underlying cost has skyrocketed, people paying mortgages will mostly not not see that increase come through if they keep living in the same house until they have to go and get a new mortgage. Rent will also not go up immediately. They'll only go up with the next annual review, and there are restrictions on how much you can increase rates depending on where it is that you live, etc. etc.

So again, you won't feel the increase in rent payments for some time. And in the inflation data, shelter sits at 7.8 percent. So here's some maths if shelter is at 7.8 and that makes up 44 of the Total Core inflation number, and core inflation sits at 4.8 Now you can do the numbers and it means that the rest of the core inflation number put together if you exclude shelter, which is lagging, is a 2.5 percent and I just increased the interest rates to 5.5 To combat this massive problem where core inflation is down at 2.5 percent, the problem with increasing interest rates is that it is not going to solve the shelter number. It will definitely add the shock to people who have to pay double for their mortgage for no particular reason.

If people have to move, they will have to move. If people have to pay the much higher mortgage costs, they will end up paying them because people have to go and live somewhere. Increasing interest rates by a quarter of a percent will not mean that people sell Suddenly, look at that interest rate and decide to sell their house and go and move into a cheaper one instead. That is not how it works.

It will not affect this metric. It is already falling. We can already see it in the data that is following. It just hasn't come through in the data.

It's not the same as buying discretionary items in the supermarket. The FED is fighting the wrong battle. But let's go back to data because remember last month the FED paused interest rate hikes to see more data. so inflation dropped from four to three percent.

Core inflation dropped from 5.3 to 4.8 percent. even though shelter is lagging and still stubbornly high. The Zump report is showing that rent prices are falling significantly in July oil has ticked up because Russia and OPEC keep producing production to try and pump the price, but it's still 20 down from a year ago. Gas price is 70 down from a year ago, actually cheaper than the average.

Over the last 25 years, every single part of inflation is trending down. Food inflation was over 10. six months ago. It's now down at 5.7 and dropping fast ever every month.

Energy Prices are still nowhere near to reflecting the drop in commodity prices, so over the next few months, Consumer Energy Inflation is going to dive significantly. It has to. There's only one way it can possibly go. Given that discrepancy, and given how consumer prices typically lag commodity prices, transportation services have now started to come down very sharply too.

So if the FED paused last month to go and have a look at more data, they got more data and the data says that inflation is dropping sharply and more rate hikes are now completely unwarranted. What data could the FED possibly have wanted to see in order to not increase interest rates? What data could have come through that was in any way better? Did they want inflation to just magic its way down from four percent to two percent in one month? Seriously, how much better could this data have possibly be? And given that we can see that the data goes against what the FED is now doing. it is patently clear that the statement that the FED made last month was an abject lie. There is no two ways about it.

If they were really waiting to see more data, the data that has come through in the last six weeks does not indicate that the inflation is sticky. It does not indicate that there is some underlying problem. It does not say that they have to keep increasing rates. There is not some kind of underlying issue like the wage inflation spiral like what we're seeing at the moment happen in the UK.

But if they didn't actually want to see more data, why did they pause the hikes last month in the first place? If they thought all along that another two hikes are necessary, it does not matter what the data says, we're gonna go and do them anyway. Why did these clowns wait six weeks to implement that increase? Because the sooner you go and do the increase, the sooner you see the effects, right? And the sooner you get to your two percent inflation? Target So if you were going to increase regardless of what the data said, which is exactly what they've gone and done, what was the point in waiting? Even going by the FED Zone logic, their actions make no sense at all. Consumers and businesses were dead are. Either way, a quarter of a percent is not exactly going to move the needle.

It's just going to make what is already really bad even worse. Because of the relative increase in interest rates. over the last 18 months, the FED keeps increasing rates without giving a about what the data is saying. And the reason is because they want to act tough.

They want to pretend that they are in control. They want to show the world that they know what they're doing when it is patently obvious they have no clue. They can't possibly admit that their projections for the last year have been completely wrong every single time. and I know that there will be people in the comments saying that the FED knows better they have more data than the random guy on YouTube right? Of course, they can make better decisions with their armies of analysts based on all of that data.

and you know what? they can see the data for July before we can see it. I Get told this all the time, which is probably why they kept saying inflation was transitory all the way through 2021 when this random guy in YouTube was saying that the numbers say exactly the opposite and it's also why they've been saying that inflation is sticky. It is here to stay for two years. It is going to be incredibly stubborn repeatedly for the last 10 months while this random guy on YouTube has been saying that the data is pointing to the exact opposite.

Again, isn't it funny that a random guy on YouTube without access to all the 420 IQ analysts and the infinite pools of data that the FED has seems to be able to just look at the numbers. Go and look at the trends. Go and look at some of the projections, make some reasonable assumptions and see exactly where it's going. The worst thing is that at the press conference yesterday, Jerome Powell kept insisting that the FED is actually doing the right thing.

The FED is now going off on their summer break until the next meeting in September because you know who wants to work in the summer Am I right? And according to Jerome Powell, they're probably going to go and do another rate increase in September. And this is where we have a really, really big off problem because it is now patently clear: Beyond Any doubt that the FED is operating outside of their remit outside of their mandate, their mandate is to do two things and two things only to ensure maximum employment and to ensure price stability. By the way, the specific two percent inflation Target the Jordan power mentions about 100 times in every press conference is actually not part of the Fomc remit. In fact, that number was just made up by Ben Bernanke 10 years ago when he was chair of the FED because inflation that time was pretty much bang on to exactly two percent and he said that of course, this two percent number is their Target because then the FED immediately achieved their Target and they could go and pop some champagne and congratulate themselves.

There was actually no statute, there was no kind of law. there's no kind of rule of anything, or there's no no, nothing that says that two percent is the magic number. The Mandate for the FED just says price stability. The FED has been repeating the same thing since they came up with that two percent number 10 years ago because they said the same thing last month I guess and it sort of become accepted as a formal goal, even though it is.

not. In reality, a steady inflation rate of 2.5 percent is not really materially different to a steady inflation rate of two percent. The key thing is the steadiness of the inflation rate, even more so than the actual level of it. But we are now in a reality where the Fed's interest rate is not based on achieving either of the Fed's two objectives, and we now have a very serious risk of over tightening, which can lead to a deflation Spike and a deflation Spike can be a whole lot worse than the inflation that the FED is now trying to fight.

And deflation Spike happens if inflation turns negative and this means that the value of your money actually starts increasing over time. And I Know, this kind of sounds really good to some people. It really sounds very good to Crypto Bros which is why crypto is often deflationary in design. You know the value of your money keeps going up and up and up, and everyone's going to be a gazillion there and everyone's going to be super rich.

The problem with deflation is that it immediately discourages spending. If you don't go and spend your 100 today, it might be worth a hundred and two dollars tomorrow. You'll be able to buy more stuff with your hundred dollars tomorrow, so you better not spend it and hold on to it instead. This is why deflation is not the way that any country manages their economy, and this can create a very, very dangerous and a very sharp spiral as people stop spending because their money is now appreciating.

You know, just keep hold of it for a little bit longer because you can make it go a little bit further tomorrow next week, next month, Next year, companies are forced to drop prices as a result of nobody spending money on their goods and services. To encourage people to spend, the cost of paying for things drops, and you can get to hold on to your money even more because you had to spend a little bit less on the core. Essentials and you can postpone a few more things as well. And that makes deflation only worse and so on and so on.

In modern history, the US had one example of deflation, which happened between 1930 and 1933, leading to the Great Depression the worst ever financial crash in the US History price drops accelerated to a point where prices were falling 10 to 20 percent a year as the spiral got out of hand and the whole US economy completely collapsed on the back of it. The very real problem we have now is that we are staring at the FED sleepwalking into artificially generating deflationary pressure where there is no actual need to do so. So what happens if shelter starts coming down at the end of this year? What happens if inflation dips to two percent at least non-shelter part of inflation. And then the prices start heading towards zero percent and maybe dipping below zero percent? Because remember, the FED has made promises that they will categorically not reduce interest rates under any circumstances.

No, no, no, No, No, No. Just like they were absolutely not gonna increase rates back in November 2021. Under any circumstances, they think that inflation will only reach two percent at some point in 2025. Maybe you know after it dropped from four to three percent last month.

The risk with over tightening is that if inflation starts pushing to zero percent and then dies under zero percent, the FED will have to cut rates from 5.5 percent or 5.75 or whatever straight down to zero. There will be in an impossible situation. They will then have to turn on the money printers to print twice as hard as they did back in 2020 just to stop the economy imploding. And they will say that me, nobody could have seen this one coming.

This was impossible to predict I Mean who could have possibly seen the implications of hiking interest rates with no particular reason to do so? This is why anyone with more than one functioning brain cell would normally tread very carefully when it comes to increasing rates with no justification. The side effects of the rate hike medicine can be far more devastating than an inflation disease that it is trying to cure. The good news though, is that the US economy has proven over the last two years to be incredibly resistant probably far more resistant than most people expected. Early data from company Q2 earnings is showing an economic rebound coming sooner than expected as well and a booming economy with high spend intent.

May Well hold off the risk of deflation long enough that even the FED even those Tweedle dumbs will realize that they have no choice. but they have to start cutting rates. And when they do start cutting rates at the end of this year, or whenever that happens, after saying, there's absolutely no chance at all that this will happen I Really look forward to all the headlines saying that nobody could have possibly seen it coming.