Hey everyone kevin here we got to talk about two things regarding the federal reserve number one. The federal reserve is clearly now going to hike rates of 50 basis points, i'm shocked by this u-turn, but it's happening. It doesn't so terribly much surprised me, though, because at the beginning of the year i was really worried about the consumer. Trending down, that is, the consumer was going to spend less.

It was my estimation that the consumer would turn inward, but instead the complete opposite is happening. Procter gamble is still raising prices because they have more previously lower income, cohorts, buying more expensive, upscale premium brand products, whether it's detergent or gillette or brand toothbrushes or whatever than ever before, and the same thing is happening at other companies kimberly clark, the banking companies. We are seeing in earnings unmatched demand, but the federal reserve released a report that we're going to look at in just a moment. That gives us a little bit more color in why the federal reserve is going for this 50 basis, point hike.

However, it's also worth noting that marie daley today gave us a little bit of insight that the federal reserve is still not ready to go for something like a shock and awe style rate hike. That is a jerome powell and others who are actually voting members over at the federal reserve, like loretta master and so on, uh. They have made it clear now that, even though they're okay with potentially a 50 basis, point hike and maybe even one more that way, we can get from uh. You know if we do 250 basis point hikes, we'll be able to get to two and a half percent in rates by the end of the year, and this is something the federal reserve wants uh previously in february, we thought they wanted to get to two percent And uh now that they want to get to two and a half percent, it's obvious that uh! If previously, we would have had 725 basis point hikes.

Well, now we're just going to end up having to have uh five 25 basis. Point hikes and two 50 basis. Point hikes, so those are coming in: it's likely that those are going to be the next two meetings that we'll see a 25 liftoff, 50 50. and then 25 25, 25, 25.

yeah, that's seven and then we'll be at about two and a half percent. So what's this report that just came out well, this is what we want to take a look at, and i want to give you just some of the highlights of it. We'll keep it short and sweet, but i do want to make it very clear that right now, news that did break uh via loretta mester and marie daley via bloomberg now is that we are not to expect a shock and awe style 75. Bp hike.

Who knows they could end up doing that in the future? Nobody was talking about a 50 basis, point hike when we were first talking about uh uh, you know like. Are we even gon na lift off right? Then we started remotely like maybe we're gon na get 50, but maybe it'll be 25, and now it's like okay, now we're definitely going to get 50.. Is it going to be 75 right so far, they're saying no, but who knows they could always just u-turn again. Just at this point, you kind of just have to build in and expect for their volatility.

So what is the report that i want to show you and give i give you a summary of well, it is called the beige book. The beige report is published eight times per year and the beige book and i'll give you a very short sweet summary on. It is basically the federal reserve banks. Remember the federal reserve is an institution, it's a research institution of about two thousand plus employees and they do interviews, questionnaires uh and they ask or and speak to their contacts, whether they're uh businesses, community organizers, economists, market experts or whatever sources they can get their hands On to kind of get a firsthand glimpse at what businesses are feeling, this is kind of like how we read the earnings reports to listen to what the ceos are saying, because those are kind of like our ways of understanding the ceo's optimism for growth in the Future like when jamie dimon at jpmorgan says hey by the way we think bank balances are gon na go up this year.

That's that's great! That's bullish! That's a good thing! That's the opposite of what we thought. Remember me and the fed together. We thought consumers would slow spending because of the war. Jerome powell called the war, a quote game changer and because of that game changer we thought oh, no.

This could make consumers stop spending and if consumers stop spending, then inflation will go away. But that's not what happened and the beige book is going to give us some color on that, but before i open the beige book, i do want to give a quick shout out to our sponsor today. Here you go. Thank you to today's sponsor north one.

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So this is interesting first, because it's like okay well since mid fed is basically when, when war was right, so we've expanded since then, but listen to the word choices they used and i've highlighted. These word choices in orange here see right here in orange. Listen to this consumer spending accelerated among retail and non-financial services. District contacts reported continued strong demand for real estate demand for workers continued to be strong.

Persistent labor demand continued to fuel strong wage growth. Strong demand generally allows firms to pass input, costs to customers via fuel surcharges or whatever firms in most districts expected inflationary pressures to continue over the coming months. Tourism spending and manufacturing activity all picked up in new york and we'll go through some of the different areas. Here in just a moment, but what do you notice there well? First of all, the reason i believe they talk about since midfield well, first of all is that's when we have the last beige book, but, most importantly, mid fab.

Is this report being done between basically from when the war started and now is really a way of us looking into the federal reserve's brains and what are they thinking well, they're thinking we can't allow inflation to get away. It is getting away what's driving inflation, it's more demand, okay! Well, we just had a war which, on one hand, war could actually lead to more inflationary costs like we're, seeing with commodities, whether that's wheat or gas, which increases input costs for producers. Producer prices go up and eventually consumer prices go up right. That's obviously inflationary, but war can also create massive disinflationary fears, because if everybody just stops buying and they they hunker down and they stop traveling because they're fearful, then inflation actually could go down more than you see those uh prices like food and energy skyrocket.

Now i know that sounds crazy and in the this honestly, in this instance, it is crazy because it's not what's happening. Consumers are like oh crap. There's a war in ukraine. Let's buy ukrainian merch, let's buy ukrainian flags, i did too okay.

Let's go travel more and live it up more because yolo, you only live once like okay war sucks. We want it to end our hearts, go out for the people in ukraine and the russians who are involved, who don't even realize all the things that are going on uh. It's it's war is so terrible and so tragic, and we always have to take a moment to realize how fortunate we are uh not to be experiencing these sorts of atrocities. But the point is, for whatever reason, the u.s consumer is still freaking booming, and so now you've got the fed going wait.

A minute we thought war was a game changer, because consumers would spend less they're actually spending more. Oh crap, let's u-turn - and this is what i call the fence u-turn - chart one two, three, all right: here's the u-turn. So first we talked about this a little bit earlier, uh that we're on this sort of inflationist transitory aspect right, but then oh wait! No inflation's! Continuing to go on, oh, but don't worry, war is a game. Changer! Oh wait! No consumers are still spending, let's go with 25 bp, oh crap, wait.

Consumers are still spending even more, let's go with 50 and then maybe level off and do 25s again. For the rest of the year and see where we go right, so this is what the fed is seeing. Let's take a little bit more of a look at the facebook here, the warren. Listen to this, like the fact that this is in the summary of cleveland.

All of this pink right here is in the summary of cleveland, should tell you that what i've just explained is literally why the fed is like. Oh crap, now a lot of people - and i i hate this, but i i also get it a lot of people. They leave me comments and go kevin. The fed's, a liar they've lied to us.

They knew what was happening uh. I honestly don't think that they're liars. I just think they were wrong. Those are very different things, because a lie implies that somebody's trying to deceive uh, which maybe that's what you think fine.

I don't believe that's what they're trying to do. I honestly think they thought oh, my gosh, the man's gon na plummet because of this war. I i placed money on those bets. Okay, i was wrong.

So is the fed read this here you go. Look at this. The war in ukraine had little meaningful impact on current demand for goods and services, but added other complexities to supply chains. In other words, we got all of the bad with none of the good like war gave us no demand destruction.

It just gave us if anything, more travel, demand and more supply chain constraints and now higher gas prices, and so on. Atlanta retail sales, high consumer spending. On services in st louis rose, oh, which reminds me we'll go back to st louis there in a moment, but i did think this was interesting. Some contacts reported early signs that the strong pace of wage growth had begun to slow.

This is good. This is that argument that maybe we're starting to finally peak in terms of inflation right, not saying i don't want people to be paid more, i'm all for people making more money, but you know we do need prices to stop going up at some point right here. You go look at kansas city again because it shows you how important this ukraine thing was in the decision making of the fed the invasion of ukraine disrupted supply chains and caused input prices to rise, but district businesses reported no effects on demand. In other words, we got all of the bad with none of the good retail sales activity in san francisco continue to expand, especially travel and, and then we get into the individual districts which, in terms of individual districts, uh, oh yeah, uh boston.

I made a note that uh companies are still planning to have further price increases. I made a little note on the side there. That's exactly what procter and gamble said. More price increases coming new york consumer spending picked up somewhat in the new york region.

I'm only giving you the in the actual region, some of the big ones here. This was interesting. Some softening is expected in consumer spending over the next few months, amid expectations of smaller tax refunds due to the advance of the child tax credit. That's because ordinarily get a 2 000 tax credit, but now it was broken up uh for for each child, but now it was broken up into 3000 or 3 600, but half of it was advanced to people in monthly payments at the end of last year, uh.

So now, that's from september, through december now you're getting that second half, but that second half you know half of 3000 is 1500, which is actually 500 less than you would have gotten under the other tax credit regime right. So that's kind of what they mean here. Pricing power was consistent with other reports over here in chicago consumer prices, moved up due to robust demand. Consumer spending moved up modestly over the reporting period, led by greater tourism and leisure.

Go over to san francisco same thing, i believe, with travel, robust demand for travel and dining professional events and conventions, slowly return to being held in person, but are not yet at pre-pandemic levels. Demand for air travel recovered further and, in some cases, outpaced pre-pandemic levels. So folks, if you're wondering why the feds seem so wishy-washy, it's because they're making like textbook decisions, they're like okay, we have a coveted pandemic. We injected the economy with a lot of money, we're going to have temporary inflation, one base effects and two reopening okay.

Great then we get hit with delta and omicron everything lasts longer. We spend more money, we have more supply chain disruptions. Great, the inflation just lasts way longer dang it they were wrong. Okay, it wasn't transitory because other events happened that made it not transitory right uh.

We printed way more money than we should have uh the money. Printer has a huge part of the blame here. Obviously, but you know it certainly avoided the depths of a recession, but now we're dealing we're a depression, but now we're dealing with um, with, with the other end of that right, so uh yeah and then, of course, you know uh the war. They were wrong about that again.

We got the bad with none of the good, and so i think that's why we saw the fed u-turn here. This beige book really gives us a lot of color. In terms of of of this, you know understanding where the fed's head is. Hopefully that helps you and if it does hey, consider, subscribing and folks we'll see in the next one goodbye.