Federal Reserve's Interest Rate Cut: Analyzing Economic Implications

The Federal Reserve's 50 basis point rate cut risks economic instability, suggesting a need for deeper cuts instead.

### The Federal Reserve's Rate Cut: A Misguided Decision
* 📉 The Federal Reserve recently cut interest rates by 50 basis points, a move the author believes is a **significant mistake**, especially when considering historical cycles of rate hikes and cuts.
* 📊 Analyzing data from as far back as 1995, the author highlights that **rate cuts typically follow rate hikes** and questions the narrative that the **current economic strength justifies such a cut**.
* 🔍 The yield curve has been inverted for two years, signaling **potential underlying economic issues**, and past inversions have often preceded **recessions**, unlike the current situation in the mid-1990s when the economy was **stable**.
* 📈 The Som rule, which indicates recession probabilities based on unemployment rates, has also been triggered, suggesting that the economy may be **closer to recession than many believe**.
* 💡 The author argues that a **75 basis point cut** would have been more appropriate, despite concerns about inflation, as historical data shows that recessions often begin with **low unemployment rates**.
* 📉 The current headline CPI is at **2.5%**, which is significantly lower than the inflation rates preceding past recessions, indicating that the Fed's current rate is **not excessively low**.
* 📉 The **2-year treasury yield** historically leads the Fed's actions, and with the current spread indicating that the Fed is **behind the curve**, the author warns against relying solely on **mainstream media narratives**.
* 💰 Ultimately, the author posits that the Fed's decision to cut rates should have been **more aggressive**, as the economic indicators point towards a **potential recession** rather than a robust recovery.

the Federal Reserve just dropped interest rates by a whopping 50 basis points, and I think this was a huge mistake. I'm going to explain why in three simple fast steps. Step number one, let's go over past cycles. We start by looking at a chart going all the way back to 1995 to today's date. This is fed funds, as you guys probably figured out, on the left we go from 0% up to 7%. Now what I want to focus on initially are these red arrows. See, these are the times in the recent past when the FED has hiked rates. We'll call it a rate-hiking cycle, and as you would imagine, the rate hikes are usually followed by rate cuts, which is what we saw yesterday when many market participants were only expecting a 25 basis point cut, and we actually got a 50 basis point cut. So what we have to do first and foremost is ask ourselves in the past, when have these rate-cutting time frames been nice, slow, and steady? Because right now, if you listen to the

mainstream Media or a lot of quote unquote experts or the Federal Reserve themselves. They'll sit there and tell you, Yeah, we did this 50 basis point hike, but, uh, you know, nothing to see here. We'll just sweep that one under the rug. Pay no attention to this 50 basis point. And why did we do 50 instead of 25? Well, it's because the economy is really, really strong, and we just want it to stay strong. So, in the future, what's going to happen over the next year or so? We are going to cut rates, but it's going to be slow. It's going to be gradual. So, if you extend this out until the next year, it's not going to look like Wet n Wild, like these water park slides, like these others. Oh, no, no, no. It's going to be nice and gradual. So, it's going to be maybe right around here, and we're just going to take our time. It's going to look a lot like the rate hiking cycle that we

saw in the mid-1990s. This is the narrative they are trying to get you to believe. But now, let's add a few more layers of data. So, we go back and look at this chart, all the ups and all the downs, and we have to ask ourselves, Okay, at what point in time was the yield curve inverted? You guys know well from watching my videos that the yield curve has been massively inverted for the past two years. That's when short-term interest rates are much higher than long-term interest rates. As you would imagine, this is very unusual, this is atypical, it's unnatural, and it tells us there's a problem with the underlying economy. In other words, when you look at the surface, everything seems fine and dandy, but once you get into the details, once you look underneath the hood, you see that there are a lot of economic storm clouds brewing. So, the yield curve definitely inverted here. We know that for sure. Did it invert prior to the surveys of sickness? That would be a yes. Did it

invert prior to the GFC. Oh yeah, did it invert prior to the dot-com bust? You better believe it did. Did it invert during the mid-90s when we didn't have a recession that followed these interest rate hikes? That would be no, we did not have an inversion of the yield curve. But now, let's ask another very important question. What about the unemployment rate? You guys know from watching my videos the Som rule recently has been triggered, and all this is is a 3-month moving average of the unemployment rate relative to the lowest unemployment rate over the past 12 months. And every single time going back to the 1950s when you have seen the P rule go above 50 basis points, we have either been in a recession or very close to a recession. So, this is extremely powerful, especially when you combine it with the inversion of the curve. So, as we know, the psle rule has also been triggered. In fact, it's not at 50 basis points, it's at 57 basis points right now. So, we have to go

through the exact same process we went through right here. Was the Som rule triggered during the seresa sickness recession? Yes, it was. GFC Bingo, com bust, you guessed it. How about the 1995 increase in interest rates? Nope, the P rule was not triggered. So, back here when we had this Fed rate hiking cycle that did not result in a recession, it's hard to use this as an example of what the FED is doing now or what we should expect moving into the future because the punchline here is we didn't have an inverted curve, we didn't have the unemployment rate R spiking. And when you look at these two key metrics, we see this time is likely again, no certainties, only probabilities, but the probabilities are extremely high that this cycle is going to play out more similar to this cycle, this cycle, and this cycle than what we saw in the mid-1990s, meaning we're not going to have slow and steady like the mainstream media and the fed and the experts are trying to get you to believe. We're going

to have Wet n Wild, and I think the huge mistake is not the fact that they dropped 50 basis points instead of 25 basis points. I think the huge mistake is that they didn't drop 75 basis points or more. Step number two. Now, I know a lot of you right about now are saying, George, have you completely lost your mind? 75 basis points? Are you crazy? Don't you understand that the unemployment rate? Yeah, sure, we've triggered the Som rule, but it's still low. It's still at 4.2%. And remember, we've got CPI. We've had inflation problems. Hello. And if the Fed cuts by 75 basis points or more, we're gonna have this reacceleration in inflation because they've cut too much, and the economy will overheat for heaven's sakes. And I get it. I get it. I get it. That's a fair argument. I know a lot of people get passionate about this stuff, but let's look at the data just like we did in Step number one. First and foremost, let's

start with the argument that, Yeah, George, we've seen unemployment spike, but historically, it's very, very low, which would indicate the economy is doing great. We've got nothing to worry about, for heaven's sakes, especially not enough to worry about that would warrant a 75 basis point cut. Alright, let's look at a chart of the unemployment rate, and let's remember that right now we are at 4.2%. So, let's just try to figure out where we were prior to the surge of sickness, and that would be 3.6%. But let's go back to the GFC, and there you go, you see the beginning of the recession right here when the Fed was really dropping rates. We're at 4.7%, not at 4.2%. George, hello? Okay, fair enough. Now, let's go back to the dot bust, and you see that right when we started the recession, we were at 4.2%, exactly where we are today. But let's not stop there, let's also go back to 1969. We see at the start of that

recession unemployment rate at 3.5%. Let's go back to 1957, 4.2%. In fact, part of the 1953 recession, we were at 2.6%. And then we go back even further to 1948, and we were at 3.7. In other words, there's probably just as many recessions, if not more, where the unemployment rate actually started near or less than where it is today. But now, let's go ahead and look at headline CPI because the argument there is that the Fed has dropped way too much, so we're going to ignite the inflation, and we're going to go right back to the 1970s. We should never, ever, ever be cutting rates by 50 basis points, heaven forbid 75, when we've got the headline CPI at 2.5%. Well, let's just start by going back to the GFC and prior to the global financial crisis, which definitely resulted in a recession. In fact, the largest recession we have seen since the 1930s. When in 2009, we actually had

deflation, deflation with a d, where prices actually went down, not to mention the massive asset deflation, where the housing market and the stock market over time, the span, went down by 50%. And we see going into this catastrophe, the inflation rate was 5.6% headline inflation. Now, I know that it understates the level of inflation, but we're using the same metrics, the same formula today pretty much that we used in 2007-2008. So again, back then, the CPI 5.6%, today 2.5%. But now, let's go back to the com bust, and we see inflation rate back then 3.6%. But wait a minute, wait a minute, wait a minute, wait a minute, how on Earth could there be a high probability that we are going into a recession, or we're in one now, or we'll be in one within the next, let's say, six months, if we have positive GDP? I mean, if you look at the last number, I did not see negative GDP. And wouldn't this be a

prerequisite. Therefore, if we don't have a contraction in economic growth, how on Earth can you argue the FED should be cutting 75 basis points? In fact, how can you even argue that they should be cutting interest rates at all, for heaven's sakes? Well, let's go back to 2008, and we see in Q2 GDP was almost 2% positive, not 2% negative. So, my point here is that there's very little in the macroeconomic data, especially when you look at this through the lens of history, that would lead you to believe the FED, even at 4.75, has interest rates too low. If anything, they've got interest rates much too high. Step number three, whatever you do, don't listen to me. Don't listen to George Gammon. You've got to listen to the marketplace. More specifically, you've got to listen to the 2-year treasury yield. And as Jeff Gunlock always points out correctly, the FED historically just follows the 2-year treasury. Let me show what I'm referring

to going to look at a chart going all the way back to 1995 to today's date. On the left, we go from 0% being the middle, then we go up to 2%, down to a negative 2%. This represents the spread between the 2-year Treasury and the FED funds. Now, it's important to not just look at the Delta; we're going to do that in a moment, but we also have to notice, editor, go ahead and throw up the chart that what Jeff Gunlock was saying as far as the FED following the two-year, meaning the two-year moves first, is spot on. Editor, go ahead and highlight the Cycles we referenced in step number one to give the viewer a visual as to how this always happens. The 2-year goes first, and then the FED catches up. So now, let's get back to the spread more specifically, and we can see that we are at an all-time, almost at an all-time extreme right now as we speak. In fact, we're pretty much at the exact same

level as we were when the FED started cutting rates prior to the GFC, and if we also look at the com bust, we see we were at a 1% spread. In other words, the two-year treasury was 1% (100 basis points) lower than fed funds, but it's not even close to where we are today. Now, another thing I want to highlight is when the FED drops rates and catches up to the 2-year treasury, it's not like the 2-year treasury just flattens out, goes sideways, and then starts to go up. Absolutely not. The 2-year treasury usually goes down even further, and in fact, it usually goes down a lot further. So, we have to ask the question: where is the 2-year treasury yield trading right now? And we can see that it's right around 3.6%. While the FED just dropped, but they dropped to 4.75%. That means the Delta is still over 100 basis points. And if history is a teacher, it reveals that even if the FED

starts dropping a lot faster than they would currently admit. The two-year treasury will just go down at the exact same pace. In other words, the FED is way off sides according to the market, even though they've dropped 50 basis points from 5.25 down to 4.75. And I know right about now I'm probably getting a lot of pushback from the viewers. In fact, I was probably getting it starting in step number one, and they're saying, Oh my gosh, George, how could you be so ignorant? The elephant in the room is obviously the 1970s. In fact, the gold price lately has been ripping higher, telling us that the FED is dropping rates too soon, not that the FED hasn't dropped rates enough. All right, well, first, let's go back, and I want to compare two charts. I want to compare a chart of the gold price over the last, let's say, year and a half, two years, and look at the gold price prior to the GFC. And you can see that these charts line up almost exactly. So the

fact that gold is ripping higher isn't exactly proof in and of itself that the FED dropped rates too early. And now let's go ahead and look at the 1970s because the argument there is, well, we had these inflationary recessions, and the mistake Arthur Burns made, or the Federal Reserve at the time, was they dropped rates too soon. And this led to a re-acceleration of consumer prices, and it took Paul Volcker coming in and jacking rates all the way up to 18% to actually break the back of inflation. Okay, that's a fair argument, but I'd like to point out that during the 1970s, we had periods of disinflation, meaning consumer prices were going up at a much slower rate. So let's compare this to the S rule. So we see that in the 1970s when the S rule was triggered, and we're just using this as a proxy for the unemployment rate or the labor market softening, and we can see this was followed every single time.

by the inflation rate going down, not going up, meaning we didn't have a reacceleration of inflation unless the unemployment rate was going down or at the very least flat. And now we have the opposite where the unemployment rate is going up. Now, I'm not saying the Phillips curve, the inverse relationship between unemployment and inflation, is correct because we see the 1970s disproves this. But what you have to look at is the trend, not just the inflation rate or not just the unemployment rate throughout history. Do we see examples of the inflation rate, consumer prices skyrocketing, while at the same time unemployment is spiking straight up as well? I can't find any, at least not in the 1970s. But George, George, George, what about the money printing? You're forgetting the fact that M2 money supply went up by 25% between 2020 and 2021. My gosh, the Fed's balance sheet is at 7 trillion for heaven's sakes, and all that money is still slashing around the

system okay fine, but let's go back to the 1970s, and we see that it is true every single time we saw a massive increase in M2 money supply. It was followed by an increase in consumer prices, but it was just followed by one wave of consumer prices. It wasn't followed by multiple waves of consumer prices. So, my point here is that once you have that money supply work its way through the system, prices adjust, but they don't keep going up and up and up and up unless you're adding more and more and more money supply, which is what we saw in the 1970s. And we've seen the exact opposite over the past two years, that once we got that spike, it didn't even flatten out. M2 money supply and M1 went down. Therefore, I would argue it's extremely difficult unless you get velocity to really, really crank up, and that's going to be unlikely if we are headed toward a recession. But it's extremely unlikely to see a re-acceleration in consumer prices.

regardless of what the FED does, assuming the amount of currency units chasing goods and services doesn't spike once again. To be clear, there are no certainties; there are only probabilities. So, I'm just sharing with you my thought process behind why I think the probabilities are high. When we look back on this time frame, let's say a year in advance, we'll see the FED should have cut not by 50 basis points, but a hell of a lot more. For more content that'll help you build wealth and thrive in a world of out-of-control central banks and big governments, check out this playlist right here, and I will see you on the next video.

OMG!! The Fed Just Made A HUGE Mistake

This channel will help you build and protect wealth through investing, real estate and an extreme dose of the economic RED PILL.  By using a very UNIQUE strategy I've increased my personal freedom and thrived financially in a world of out of control central banks and big governments.  And now I'm going to teach you to do the same.  

I'm NOT a guru, I'm a former entrepreneur, turned investor, who has years of experience investing in multiple countries.  My goal is simply to share my secrets of success with you.     

So what are you waiting for?  SUBSCRIBE NOW!! 

George

SUPPORT THE CHANNEL!  1.  Donate via PayPal  2.  Use our Amazon affiliate link  
 
https://paypal.me/GeorgeGammonSupport?locale.x=en_US

https://amzn.to/2Duz8CE

Follow me on Twitter! https://www.Twitter.com/GeorgeGammon


George Gammon

The Federal Reserve's 50 Basis Point Rate Cut: A Mistake?

The Federal Reserve recently cut interest rates by 50 basis points, which the author views as a significant error.

The cut follows a pattern of rate hikes and is being justified by a strong economy, but the author questions this narrative.

Additionally, the yield curve has been inverted for the past two years, indicating underlying economic problems despite a seemingly stable surface.

The Impact of Yield Curve Inversion and Unemployment Rate on Recession Predictions

The yield curve has inverted before major economic downturns, including the GFC and dot-com bust, but not during the mid-90s when interest rates were raised.

The Som rule, a 3-month moving average of the unemployment rate, has consistently indicated impending recessions when it rises above 50 basis points.

Currently, the Som rule is at 57 basis points, suggesting a high probability of a recession, especially when combined with the yield curve inversion.

Analyzing Unemployment Rates and Recession Predictions

Unemployment rates have historically been low, with the current rate at 4.

2%, similar to previous recession starts.

The argument against cutting rates is weakened by the fact that past recessions also began with low unemployment rates.

Additionally, the current headline CPI is at 2.

5%, significantly lower than the inflation rates during previous major recessions, raising questions about the likelihood of a recession with positive GDP growth.

The FED's Interest Rate Decisions and the 2-Year Treasury Yield

The argument for cutting interest rates is weak, as macroeconomic data shows positive growth and historical trends indicate the FED's rates are too high.

The 2-year treasury yield has historically led the FED's actions, and the current spread between the two is at an extreme, similar to levels before previous rate cuts.

The 2-year treasury yield is currently at 3.

6%, over 100 basis points lower than the FED's rate, suggesting that further rate cuts may be necessary.

The Federal Reserve's Rate Drops and Market Reaction

The Federal Reserve's rate drops are seen as too slow by the market, with a significant decrease in the two-year treasury expected.

The rising gold price is being interpreted as a sign that the FED is dropping rates too soon, but historical charts show no clear proof of this.

The 1970s inflationary recessions and the relationship between unemployment and inflation present a complex picture, challenging the idea that rate drops will lead to a reacceleration of consumer prices.

The Impact of M2 Money Supply on Consumer Prices

Historically, a significant increase in M2 money supply has led to a one-time wave of consumer price increases, rather than multiple waves.

In contrast, the past two years have seen a decline in M2 and M1 money supply, making a re-acceleration of consumer prices unlikely.

The speaker argues that unless there is a significant spike in the money supply again, a re-acceleration in consumer prices is improbable, regardless of the Federal Reserve's actions.