Will The Fed Cut Interest Rates Now That Jerome Powell Is Leaving?

0:00All right, ladies and gentlemen, Jerome Powell and the Federal Reserve, what are they doing? Yesterday, they announced that they are not going to cut interest rates. They said, put the brakes on it and let's hold right here. Three and a half to 3.75 % despite all the changes. We got war going on. We got AI firing around the world. Everything that's happening, the Federal Reserve said we ain't cutting rates. Now, why are they doing this? Why are they not cutting rates? Well, Jerome Powell says it's because he thinks that the policy rate is in a good place. Shocker, Jerome. Take a listen to his logic right here.

0:31Where we're at is we think our policy rate is in a good place. If we need to hike, we will certainly signal that and we will certainly do it. And if we need to cut, then if it's appropriate to cut, then we'll signal the opposite. I think because we feel like we're in a good place to move in either direction, nobody's calling for a hike right now. so it really is going to depend on how things how things evolve and you know that that's really where it is you know as i mentioned close you know much closer question this cycle on changing the guidance but but ultimately we didn't now this soundbite from powell may seem simple you know it's just some clear words that he's saying but there was significant disagreement inside the fomc meeting and so if jerome powell thinks it's in a good place there's four people who didn't There are 12 people who voted during the FOMC meeting.

1:25And of those 12, eight voted for keeping rates where they are and for dissented. The last time four people dissented in a Fed meeting was October 1992. That means we haven't had this much disagreement inside America's Central Bank in over 30 years, three decades. It's a pretty big deal. But maybe most interestingly, Jerome Powell, the big boss of the Fed, he announced that he's going to be staying on the Fed board until his term is up in 2028. He's the chairman right now. He's going to step down from being the chairman. Kevin Walsh is going to come in. But it is unusual for the Fed chairman to not ride into the sunset once their chairmanship is over.

2:01Powell claims that he needs to do this. He has no choice. His hand is being forced. Take a listen to why. You know, I'm literally staying because of the actions that have been taken. I had long planned to be retiring. And, you know, the things that have happened in really in the last three months have, I I think, left me no choice but to stay until I see them through at least that long. Now, whether you believe him or not, Powell seems committed to seeing his term through. So this brings us to the big question moving forward. Will the Fed cut interest rates or not in the coming months? Now, Charlie Belolo, he goes right to the bond market.

2:34He's a data guy. He says that the bond market is now pricing in a higher probability of a Fed rate hike, 12 percent, by the end of this year than a rate cut, which is only at 5 percent. Wait, what? The bond market is saying the Fed's going to hike rates instead of cut them? That's a little bit of a narrative violation. Kaoshi is saying only a 4 % chance of an interest rate cut in June of this year and less than 1 % chance of the Fed raising rates as well. And then the prediction market is showing a 20 % chance of a rate hike by the end of this year, but more than a 60 % chance of a rate hike by the end of next year.

3:08A big input to this decision to cut or raise interest rates is going to be the next boss, Kevin Warsh. He's the new incoming Fed chairman, and he's publicly testified that he believes rates should be lower. But that doesn't necessarily mean that he's going to actually cut interest rates. SoFi CEO Anthony Noto, he thinks the credit markets in the home loan market are suffering because of the high cost of debt that we're currently experiencing. And lower rates would obviously provide relief there. Take a listen to why Anthony thinks that Warsh may actually cut rates. I do think there will be a greater propensity to want to deliver rate cuts.

3:44The credit markets and the home market, home loan market, are definitely suffering from the high cost of debt. And that's going to impact the economy at some point in 2026, sorry, 2027, if there is an action taken in 2026. So I think we'll actually enter a period in which we'll see a bias towards rate cuts versus today, where the bias is to manage inflation at the expense of rate cuts. But the dual mandate's really critical here. And I think the leadership will deliver on the easing of credit in order to drive more growth, which will help us deleverage the balance sheet. Makes sense to me what Noto's saying here.

4:21But Ray Dalio, the founder of the world's largest hedge fund, he issued the exact opposite warning yesterday. He went on television and said it would be a mistake for Kevin Warsh to cut interest rates. Here's why Ray Dalio thinks that. Would it be a mistake for him to cut interest rates in this environment? Yeah, in my opinion, it certainly would. Why? Because of oil prices? Well, because of the issues that are here in terms of a more immediate inflation, farther from the target in terms of inflation target, and also the credibility that everybody's going to look at how he behaves in terms of monetary policy.

5:00So if you were to take and ask that question to almost anybody who's objective, they would say certainly you would not cut interest rates now. OK, you will lose your credibility. The Federal Reserve would lose its credibility, particularly now, almost at any time. And so I would say, but beyond that, it's not the right way to have monetary policy, given all things considered. He should wait till when? Well, you have a dual mandate, right? You're in a stagflationary period. We're in a stagflationary period. You think we are? We are certainly in the stagflationary period. Now, how that transpires has a lot of parts to it, but we're certainly in that.

5:42And if you look at monetary policies by other countries, you're not going to see them cutting. OK, so whatever your benchmarks are, you're not going to be inclined to cut the monetary policies, not with today's information. Now, interestingly, hearing so many people have different views is exactly why there's so much dissent inside the FOMC, too. Remember, there are people all over the world trying to figure out this complex market. They're trying to understand what's going on. Why is it happening? What's going to happen in the future? And how do I allocate capital? If they disagree in the FOMC, they probably disagree in the streets.

6:17That's what we're seeing all over television. But one area that has become clear is that the Federal Reserve continues to actively participate in the destruction of the U.S. dollar's purchasing power. Jeff Swanson shows that when priced in gold, the U.S. stock market is lower today than it was in 1968. That's crazy to me. You got a better return by buying gold and holding it for more than 50 years. There are a lot of equity investors that probably don't like to hear that, but it's true, just look at the data. So what do I think? I think the Fed's in a no-win situation. They have to cut interest rates because of the structural deflationary trends that are eating the economy.

6:53But if they do it in an irresponsible way, they risk creating more short-term inflationary pressures. So rather than risk it, the Fed's essentially just kicking the can down the road. And they're saying, you know what? We're not gonna make a decision right now. We're just gonna hold steady right where we are. Remember, putting the brakes on. But you know what? Maybe no decision is the best decision that they can make. You gotta remember, the current Fed administration under Jerome Powell has a horrendous track record. All they have done over the last five years is create historical inflation, bankrupt numerous banks by hiking rates at the fastest pace in history, They spent billions of dollars of taxpayer money on palatial buildings fit for a king.

7:30And then they created a wider wealth inequality gap that has an outsized negative impact on all the Americans in lower socioeconomic groups. It's not exactly a great resume to hang your hat on. And so maybe I'm just biased. Maybe I just don't like them because I think they made a lot of mistakes. But I do think that the Fed has interest rates too high right now. I think deflation is a much bigger risk than the central bankers seem to believe. And so I want to leave you with the other side of the argument. I'll leave you with a few comments from David Rubenstein. He's the billionaire co-founder of the Carlyle Group, and he was on CNBC yesterday defending Jerome Powell because he thinks that Jerome Powell did a good job avoiding a recession and sidestepping a public argument with the president.

8:10Take a listen to what David had to say. During Jay Powell's turn tenure as Fed chair, he's had 15 rate increases and 12 rate decreases. So more or less about even. But what he had to deal with was one of the hardest problems any Fed chair has ever had. When he became Fed chair, not long thereafter, we went into COVID. And as a result, the Trump administration and the Biden administration injected about five trillion dollars into the economy with no corresponding tax increases. That obviously produced inflation, which went as high as nine percent. J-PAL had to engineer a situation where we did not go into a recession, but also had to deal with high inflation.

8:52And fortunately, we did not really go into a real recession. There was a technical recession, but generally we didn't have a recession during his eight and third years as Fed chair. So I think he deserves credit for engineering that and for being transparent and also for not, I would say, getting into a fight with President Trump. And obviously, many of us would probably say it's difficult to have a president of the United States criticize you and not respond. But I think he basically did not respond to that and bit his tongue for most of the time he was Fed chair. So on the whole, I think the country owes him a lot of gratitude for doing a good job in engineering the post-COVID inflationary situation in the United States.

9:33So there you have it. You got my opinion. You got David Rubenstein's opinion. You got Ray Dalio. You got Anthony Noto. You got a whole bunch of people that are all trying to figure out what's going on in the market and should the Fed cut rates or not. Kevin Warsh is coming in and he is like a torpedo trying to cut interest rates. But the market may force his hand, force him to keep interest rates where they are. Or if you believe the prediction markets, he may actually have to increase rates. And that would be a surprise for a lot of people.