From: allin
The Federal Reserve recently held a meeting to discuss overnight rates and their economic outlook, influenced by current inflation and economic activity data [00:28:57]. The published minutes from this meeting provide insight into the Fed’s perspective and future intentions regarding monetary policy.
Federal Reserve’s Assessment
The Federal Reserve, in its latest meeting, acknowledged that inflation remained “unacceptably high” [00:29:26]. Data, including the Consumer Price Index (CPI) for May, indicated that the decline in inflation was slower than anticipated [00:29:29]. While core goods inflation had moderated since mid-last year, its slowdown in recent months was less rapid than expected, despite easing supply chain constraints [00:29:36].
Consumer Spending and Household Wealth
Participants observed that consumer spending had been stronger than expected this year [00:29:52]. Aggregate household wealth remained high, as equity and home prices had not significantly declined from recent highs [00:29:57]. However, some participants noted signs that consumers were facing “increasingly tighter budgets” due to high inflation, particularly for low-income households, despite accumulated excess savings during the pandemic [00:30:03].
Monetary Policy Outlook
Although the Fed decided not to raise rates at this meeting, they anticipate two more 25-basis-point rate hikes later in the year [00:30:20]. This stance aligns with the Fed’s apparent strategy to orchestrate a “pretty soft landing” for the economy [00:30:47]. Their own forecast for CPI indicates a significant decline by year-end [00:31:29].
Labor Market Indicators
The Federal Reserve closely monitors labor market data to assess the economy’s temperature [00:31:51]. A recent ADP jobs report showed over 450,000 new jobs created [00:32:01]. However, the JOLTS (Job Openings and Labor Turnover Survey) report, considered a leading indicator, showed that more people took jobs than anticipated, leading to fewer job openings [00:32:27]. This suggests a healthy trend in the economy, as people are now taking jobs that were previously unfilled due to COVID concerns or government stimulus checks [00:33:10]. Approximately half of the new jobs were in hospitality and leisure, addressing desperately needed positions during the peak summer travel season [00:54:51].
The Soft Landing Debate
Brad Gerstner suggests that the Fed seems to be orchestrating a “pretty soft landing” for the economy [00:30:47]. He notes that the market initially “fought it” but the NASDAQ was up significantly in the first half of the year [00:30:52]. He argues that while inflation might be “stickier on the way down,” it doesn’t necessarily mean the economy will crash [00:31:11]. With job openings coming down and inflation trending lower, he believes a softer landing is a strong possibility [00:34:16].
Chamath Palihapitiya agrees there will be “no hard landing,” especially with China stimulating its economy [00:34:42]. He believes the US has done the best job among developed nations in getting inflation under control [00:35:15]. He supports the Fed’s strategy of keeping rates relatively elevated to give them “bullets in the chamber” for future interventions if needed [00:36:21]. The current rates, close to six percent, provide positive optionality [00:35:37].
David Sacks, however, believes the US is not “out of the woods quite yet” [00:38:34]. He highlights the inverted yield curve, which is the most inverted and longest-standing it has been [00:38:54]. This inversion places “incredible pressure on the banking system” because their business model of borrowing short and lending long doesn’t work when short rates are higher than long rates [00:39:10].
Banking Sector Stress and Credit Conditions
The Fed minutes included a discussion on the stress in the banking sector, with participants generally noting that “banking stresses had receded” and “conditions in the banking sector were much improved since March” [00:39:50]. They continue to judge that tightening credit conditions, spurred by earlier banking sector stress, would likely “weigh further on economic activity, but the extent remained uncertain” [00:40:06].
David Sacks points out that the Fed engaged in an “extraordinary intervention” a few months ago to save the banking system through the Bank Term Funding Program (BTFP) [00:40:37]. This program allowed banks to present US treasuries and mortgage-backed securities at par value, providing significant liquidity [00:40:50].
Chamath notes a “looming credit crisis in the United States” [00:43:01], particularly concerning the “debt wall that Corporate America is about to hit” [00:43:10]. Many companies and private equity firms are over-leveraged and will face significant challenges if rates don’t go down materially in the next 18-24 months [00:43:17]. He predicts the federal government will likely intervene to “monetize that debt” and “support that commercial real estate sector” through structured lending programs [00:45:00], due to the significant amount of these assets held by pension funds and life insurance companies [00:46:27].
International Economic Comparisons
Chamath highlights that while the US is managing inflation well, other Western developed nations face significant economic challenges [00:35:15].
- UK: The UK is in “a lot of trouble” with its rates potentially reaching seven or eight percent [00:36:09], and inflation still rising (7.9% in May, up from 7.8% in April) [00:49:43]. Its economic situation is “really bad” [00:49:28], seen as a consequence of leaving the EU, which would have smoothed out variants and provided a larger balance sheet [00:50:07].
- Eurozone: The Eurozone, including Germany, is likely “a quarter into a recession already” [00:47:51], largely stemming from the cutoff of cheap Russian gas [00:51:00].
- China: China faces “super super trouble” and “imploding” internal demand [00:35:05]. Its export controls are not helping solve the problem, as they accelerate Western economies’ desire to de-leverage from China [00:38:16].
The overall setup is “very complicated,” but the US economy “looks really good frankly” [00:38:30].
Market Outlook and Investment Strategy
The market’s implied Fed fund rate changes indicate a peak at around 5.45% by November of this year [00:52:41]. Subsequently, there could be a shift towards rate cuts as CPI and job numbers continue to roll over [00:52:56]. Brad Gerstner advises against trying to “call the Market as though you know you have no idea” [00:52:04], instead suggesting adjusting exposure based on market sentiment. High exposures are warranted when the world is panicked, and should be reeled in as markets price in a soft landing [00:53:51].