The Fed Is In Crisis Over Rate Cuts

0:00Hello, everyone. There's a crisis underway at the Federal Reserve. Jerome Powell is dealing with a revolt. We have new proof that the poverty line should actually be$140 ,000 a year, and the Bitcoin price, it continues to upset millions of holders. We're live today from the desk of Anthony Pompliano.

0:26Before we get into today's episode, I need your help. We currently have 39 ,714 subscribers, but my goal is to get to 1 million subs. Before you get to a million, you got to get to 50 ,000, which means if you hit that button, you'll help us get closer to the goal. Let's get into today's episode. Ladies and gentlemen, there is a crisis underway at the Federal Reserve. Jerome Powell is under immense pressure as he deals with a revolt from his fellow central bankers. In my opinion, this is going to become the story of the year if things continue deteriorating. In order to understand what's happening right now, we have to remember that the Federal Reserve and the Board of Governors, they have a history of debating policy decisions behind closed doors, out of the eye of the American people.

1:08Yet they almost always put on a united front when it comes time for their periodic vote in monetary policy. That is why it was such a big deal when two Fed governors dissented at the exact same time back in July of this year. Not one, but two governors dissenting in the same exact meeting. We had not seen two Fed governors dissent in the same meeting since 1993. And so the rarity of that situation raised eyebrows at the time. But also, at the time, most people wrote off the anomaly as a politically driven outcome. Fed Chairman Jerome Powell, he doesn't seem to be a fan of Donald Trump or the Trump administration.

1:41And those two Fed governors who had dissented, they were Trump nominees. The Fed's supposed to be independent. But if you believe that, I got a bridge to sell you. The institution is made up of humans. Humans are biased. That bias doesn't have to surface in a malicious or nefarious way, but every human is affected by their personal beliefs. That's how human nature works. And no one, not even a central bank, is safe from that human nature. But now we're getting information today that those two governor dissents in July, they may not have been politics. They may have actually been a warning sign of things to come.

2:15Bloomberg's Katerina Sariva, she published an article over the weekend titled, Fed Watchers Turn to Vote Counting as December Rate Drama Grows. In the article, Katerina writes, The division at the Federal Reserve has intensified in recent weeks, with officials staking out disparate positions ahead of the central bank's December policy meeting, all while Chair Jerome Powell stays silent. The drama was amped up on Friday when New York Fed President John Williams, who's sometimes seen as a proxy for the Fed chief, John Williams signaled his support for a rate cut after several other policymakers came out leaning against one.

2:52Now, Powell himself hasn't spoken publicly since the central bank's last rate decision on October 29th. But a tally of recent remarks suggests the other voting members of the rate-setting Federal Open Market Committee are now nearly evenly split over what to do. They can't agree. All but ensuring some will vote against the December 10th decision regardless of the outcome. Now, here's the deal. These dissents are a big deal because they show cracks in the central bank's armor. You can think of the constant dissents, especially from Fed governors, is a very negative signal. There's no consensus internally.

3:25There is no peace. These dissents also highlight how difficult and complex the current economic environment is. The recent disagreements are even more pronounced because Chairman Powell has actually done a very good job of driving consensus throughout his entire tenure. But it's all changing now. This situation actually reminds me a lot of a book. It's called The Lords of Easy Money. It, in my opinion, is the best breakdown of the Federal Reserve's actions during the global financial crisis. Now, the book's important because it lays out what many people are afraid to say in public. The Federal Reserve, the American Central Bank, may have done more harm than good to the U.S.

4:01economy in the last 20 years. The book's description states the following. If you asked most people what forces led to today's unprecedented income inequality and financial crashes, no one would say the Federal Reserve. For most of its history, the Fed has actually enjoyed the fawning adoration of the press. When the economy grew, it was credited to the Fed. When the economy imploded in 2008, the Fed got credit for rescuing us. But here for the first time is the inside story of how the Fed has reshaped the American economy for the worse. The Lords of Easy Money skillfully tells the fascinating tale of how quantitative easing is imperiling the American economy through the story of the one man who tried to warn us.

4:44Now, who was that man? That one man was Thomas Honig, and he looks very, very smart in hindsight. So what did Honig do back then? Well, his legacy is explained with the following. In the aftermath of the 2007 recession, Honig was thrust upon a national stage as he spoke out frequently about the financial crisis and its causes, as well as the response to the crisis in terms of both regulatory changes and the monetary policy. Honig cast the lone dissenting voice against the FOMC's easy money policies at each of the eight FOMC meetings in 2010. And he was troubled by the FOMC's stated promise of keeping the federal fund rate at a historic low for an extended period of time.

5:22He also spoke out frequently about the large and systemically critical financial firms known as too big to fail. Their carelessness and mismanagement, he said, were a major cause of the crisis. Now, here's the deal. With the benefit of hindsight, it's hard to argue that Honig was wrong. My guess is that other people in that room, they also disagreed with decisions being made. But those people, they chose loyalty to the Fed institution over loyalty to the American people. Today, it looks like there are fewer Fed Reserve officials that are willing to make that same mistake again. If the Fed held their monetary policy vote today instead of on December 10th, Jim Bianco believes that the current split would be seven to five in favor of another interest rate cut.

6:03Now, Jim's belief is supported by the approximately 63 % odds that is being assigned by the market to a December rate cut. Even Polymarket, the prediction market, they've got the odds of a 25 basis point cut in December at 95 % right now. But this rate cut decision is not going to happen for another four weeks. The vote's not happening today. We got to wait until December 10th. It's a really long time in financial markets. Remember, data can change, sentiment can change, and of course, opinions can change. And so you can't rely on today's information or today's sentiment to get a guaranteed outcome in a couple of weeks.

6:38However, one thing that has been changing is the financial environment for the average American. They're in pain and they want relief as fast as possible. Maybe a rate cut would help in some cases, but it also may create more pain in other cases. That's why yesterday when MSNBC's Kristen Welker asked Treasury Secretary Scott Besson, how long do Americans need to be patient? How long do they have to wait for the cost of living to come down? It was really important to pay attention to what Besson said. Here is what Besson responded with and his views on what he calls the three I's. In March of 2024, I wrote a piece and I talked about the three I's that were killing Americans.

7:16Immigration, interest rates, and inflation. Presidents close the border and the mass immigration is gone. And that was putting, a lot of the immigration was putting upward pressure on housing, downward pressure on wages. Interest rates are down. And now we are starting to see the affordability. The prices get better. We had a very big October for home sales. Energy prices, gasoline is down.

7:47We believe health care is going to come down. We will see an announcement this coming week on that. And so across the board, prices are starting to come down. We're having Thanksgiving week. This will be the lowest cost for a Thanksgiving dinner in four years. Turkey prices are down 16%. Now, this is ultimately the challenge of managing an economy. The Federal Reserve is slowly bringing down interest rates. But the Treasury Secretary and Trump's administration and his economic policy advisors, they're trying to address affordability on a national stage right now. You can think of the Fed trying to pull the short-term levers.

8:24And the rest of the government, including the Treasury, they're trying to pull long-term levers. It's not a perfect analogy, but it's closer to reality than many people think. We've got competing interests and competing timelines that are running into conflict with each other. There's never gonna be a perfect solution to these problems. The global economy is a complex machine. No one can agree on what the data says, let alone how various decisions will impact the economy. Politics, monetary policy, and economic decisions, they're all intertwined now. And now all eyes are on the Fed's December rate cut decision.

8:54So what do I think? Well, my guess is that the central bank's going to cut another 25 basis points. I don't necessarily agree with that decision. My preference all year has actually been for a 50 basis point cut because I think that we need to quickly get to a sub 3 % interest rate number for the cost of capital to come down. That should provide relief for the average family. It should incentivize investment in R &D, and it should generally increase GDP to even more impressive levels of growth. Now, I don't think that there's any chance of us getting a 50 basis point cut, especially because the Fed is flying blind without some of the BLS data from recent months.

9:27So they're going to chicken out as they always do. They're going to continue slowly bringing down the Fed funds rate. But if they don't cut interest rates and they just hold, or God forbid they even increase for some reason, there's going to be chaos on Wall Street and markets are going to fall from the sky. The crowd and the financial markets know we need cheap capital and they're expecting the Fed to deliver. And market chaos, in my opinion, is not something that Jerome Powell and the Fed is willing to risk. What if I told you that the poverty line shouldn't actually be at$31 ,000 a year? Instead, it should be at$140 ,000.

9:59That is the conclusion from a brand new piece from Mike Green. There are plenty of things that Mike and I disagree on, but this piece is excellent, and Mike did a fantastic job. So here's what he wrote. If we look at how the poverty line is actually calculated, the formula was developed by Molly Orshansky. She was an economist at the Social Security Administration in 1963. And the whole idea was that she observed that families spent roughly one third of their income on groceries. Since pricing data was hard to come by for most items, if you could calculate a minimum adequate food budget at the grocery store, you could then just multiply it by three and that would establish the poverty line.

10:34So Orshansky was careful about what she was measuring. In her January 1965 article, she presented the poverty threshold as a measure of income inadequacy, not income adequacy. inadequacy. If it is not possible to state unequivocally how much is enough, it should be possible to assert how much confidence somebody could have to say it is too little. Essentially, Mike says she was drawing a floor. It was a line below which families were clearly in crisis. That's why the poverty line has become so popular. Now, this makes sense. Roshansky was trying to measure poverty by figuring out what was not enough for someone to sustainably live.

11:09People in finance and politics constantly talk about the declining number of people living in poverty. You'll see them show this chart right here over and over and over again. And that's a good thing. These people aren't wrong. Using the data we have, the number of people in poverty has declined. You want to see this going down and to the right. That is ultimately what we should be celebrating. Improvement, development, and advancement in the society. But there's only one problem. What if the data is wrong? Now, as many of you know, I constantly rail against the economic data as being inaccurate.

11:39Mike Green shows that the$31 ,000 poverty line measurement may be the latest victim of this problem. Now, here's how Mike describes what's happening. Orshansky's food times three formula was crude, but as a crisis threshold, a measure of too little, it roughly corresponded to reality. So a family that spent one third of its income on food would spend the other two thirds on everything else. And those proportions more or less worked. That's why this became popular. Below that line, you were in genuine crisis. Above it, you had a fighting chance. But Mike says that everything changed between 1963 and 2024.

12:12Housing costs exploded. Healthcare became the largest household expense for many families. Employer coverage shrank while deductibles grew. Childcare became a market and that market became ruinously expensive. College went from affordable to crippling. Transportation costs rose as cities sprawled and public transit withered under government neglect. The labor model shifted. A second income became mandatory to maintain the standard of living that one income formerly provided. And but a second income meant childcare became mandatory. which meant two cars became mandatory. Or maybe you'd simply be asking for a lot, generationally speaking, because living near your parents helps to defray those childcare costs.

12:51So the composition of household spending transformed completely. In 2024, food at home is no longer 33 % of household spending. For most families, it's 5 % to 7%. Housing now consumes 35 % to 45%. Healthcare takes 15 % to 25%. Child care for families with young children can eat 20 to 40%. So if you keep Orshansky's logic, if you maintain her principle that poverty should be defined by the inverse of food's budget share, you have to update the food share to reflect today's reality. The multiplier is no longer three, it becomes 16. Which means if you measured income inadequacy today, the way Orshansky measured it in 1963, the threshold for a family of four would not be$31 ,200.

13:37It would be somewhere between$130 ,000 and$150 ,000 per year. That is mind-blowing. Think of how crazy it is for us to be running around creating economic policy, believing that two-thirds of all Americans are above the poverty line, that only a small subset of people are actually below that$31 ,200 threshold. But instead, if you take the same logic that created that poverty line and you apply it to today's numbers, all of a sudden the number jumps up to$140 ,000. And you realize that two thirds of Americans are actually living below that new modern poverty line. That's why people feel like they can't get ahead.

14:17It's why they feel like they're falling behind. It's because actually the data is lying to us. The economic data is inaccurate. The methodology, the collection, everything is flawed. And so no wonder the data says one thing, but people are screaming something else. You have to eventually listen to the people and to their pain. If two-thirds of Americans are living below the modern poverty line, then no wonder everything is breaking. No wonder people are turning to socialism or anything else. They simply realize that the system is not working for them. And Mike Green shows. It's because the data is telling politicians and policymakers everything is fine.

14:55It's actually improving. But the people's reality is saying something completely different. Bitcoin's price keeps falling. People are freaking out. I sat down with Jordy Visser this weekend and I asked him, what do you think about the market drop? And can we find a bottom to this price action? Here's what Jordy had to say. the S &P is still only about 5 % off all-time highs. So when we went through this, and you're naming how sentiment in some measures is lower than it was on Liberation Day, yet we're nowhere near that in terms of just the S &P fall. So this has really been speculative retail names, and obviously Bitcoin.

15:36These have been the areas. And for everyone who's also lost money in altcoins, This is all of crypto, so this isn't just there. But I will say this. For everyone who's watched me here or on my weekly, I always say the same thing. And I think it gets boring to people, but I really do believe that we will be climbing a wall of AI worry forever. And I really do mean forever. behind the scenes as we're seeing speculative names fall off. And I've highlighted that I created an index which had the names that I think were heavily speculated on that really didn't have any revenues that were based on things like nuclear, which may be a solution five years in the future, but nothing in the near term.

16:24And Bitcoin obviously falls into that camp where it doesn't have a normal valuation side to it. So we're at a point where people have basically bailed out for the time being, and they're getting stopped out. And as someone who, let's say, I had some really nice trading profits going this year until recently. And then about two weeks ago, I started to increase my, you know, my regular buying of Bitcoin, of which there's always regular buying. Then I started to doing some increased buying below 100 ,000. So, you know, between MicroStrategy and Bitcoin, they've eaten up a lot of my semiconductor profits and now my Eli Lilly profits.

17:04And we're kind of sitting here and I can feel that the narrative as prices are going down, I'm seeing more and more panic on the AI side, more and more people kind of beating their chest that this is artificial intelligence unwind and that the bubble is popping. And that's where this is really going to come down to it. I don't hear many people when I speak to them that use AI or that do as much research as I do across kind of what's coming. And I just feel like in a week like this or a month like this, a lot of this is just losses on top of losses. We were going to see corrections. That speculative name basket has given up the entire year, and it was up significantly.

17:45Bitcoin's given up the entire year. We've knocked retail out. So I wrote a piece this week that there is light at the end of the turbulence. I wrote one with a similar title back in Liberation Day, and I hate for people to ignore it. But the message is the same, which is when those fear and greed index get to these low levels, my historical kind of belief is unless the economy follows it and goes down like it did after the housing bubble and like that, that's the only way that it's justified. If not, and we're in a bull trend, and I will remind people, every market around the world is up double digits.

18:21So even the S &P 500 and earnings growth is happening faster outside the US than it is inside the US. And US earnings are growing faster than what the market's up this year. So under the hood of everything, AI is still pushing things forward. We'll find a bottom in six months from now, people will look back and really not remember the panic that ensued. Now, I tend to agree with Jordy. Everyone freaks out. Eventually the market will find a bottom and everything will be just fine. In fact, I went over the weekend and I took a deep look at how often does Bitcoin's price draw down 30, 40, 50%. I then went on CNBC Squawk Box this morning and I explained what I found.

18:56Take a listen. Yeah, well, let's put this all in context real quick. So over the last decade, Bitcoin has drawn down 30 percent or more 21 different times. Of that, seven of them have been 50 percent or more. That's like having a global financial crisis every year and a half for a decade. So Bitcoiners are used to this. Now, who's not used to this are the people who are coming from Wall Street. They're not used to this type of volatility. You know, global financial crisis, there is literally people still fearful of that happening again. And so I think that what we're watching is as the rotation of the holder base happens, these new people are very, very fearful.

19:31We're going into end of year. There's things around bonuses. People are trying to figure out, should I actually sell this asset that I thought I was really excited about? And I think that's putting some downward pressure on the price. Now, in terms of that drawdown, given that there's been 21, 30 plus percent drawdowns, I do think that a 35 percent drawdown that we've seen from the all time high is pretty healthy reset. And I think that there's a question in the industry. Is this going to be one of these very large drawdowns that we've seen in terms of these bear markets of 70, 80 percent? Or is this simply something that is more normal and we should expect this reset to then provide a new base?

20:04And then we go back to all time highs over the next couple of weeks or months. And where do you stand on that question that you just posed yourself? You know, I heard something pretty interesting. Matt Siegel over at VanEck said, well, Bitcoin's in terms of Bitcoin's volatility has been cut in half over the last year or two. And so if that's the case, if we're used to 80 percent drawdowns, maybe now the drawdowns are about 40 percent. Right. You would expect that if the volatility has been cut in half. Well, we just saw 36, 37 percent drawdown. And so I do think that as volatility compresses, people will be disappointed to the upside because it's not going to have these blow off tops that they expected.

20:40But also there may be some, you know, safety in terms of these 80 percent drawdowns are gone as well. And so I tend to think that we probably are somewhere around the bottoming. Again, if you see the fear and greed index at, I think it was eight for Bitcoin, six in equities, that tells me that you can't stay there that long. And so I think that we might just go sideways for a while here and then start to kind of grind back up over the next couple of weeks. So there you have it. Seeing Bitcoin's price drop 30, 35 percent. Yeah, it hurts in the moment, but actually it's pretty common. More than 20 times it's happened over the last decade.

21:14During that period, Bitcoin is up 240x. I'll take 240X for a couple of drawdowns of 30 % along the way. That's it for today's show. Thank you guys so much for watching. Please remember to subscribe on YouTube. We have 39 ,714 of you already, and I'd love for you to join us. Hit the subscribe button, and I'll see you guys live tomorrow from the desk of Anthony Pompliano.