Election Year: What Will the Fed Do? | Top of Mind Series

All right, podcast listeners, the election year is upon us. Oh joy. What does that mean for interest rates? Will the Fed hold steady or will they succumb and try and get this president elected? All right, let's tune in and get the scoop.

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Man, it's going to be a crazy year. So everyone, thanks so much for tuning in. This is our Top of Mind episode. These are kind of shorter episodes that are focused on one topic, something we're reading in the news, different articles, and also educational content. So I love putting these together. As you maybe have some suggestions of things you want to hear us talk about, please share those on thebillionairepodcast.com. So yes, let's dive into it, right?

Can we say I told you so first for the like nth time? Yeah.

Yeah. Well, I mean, it's so interesting because it's, yeah, we're looking at all these numbers coming out and all these headlines that are acting surprised with the, you know, GDP print or the jobs added last month.

And yeah, jobs, 353,000 jobs added last month. And the economy way above what people expected. And then the, the, the 2023 GDP print came in at 3.1% growth, which is very pretty high growth for the United States. And the last quarter was at a 3.3% pace, way, way higher. And, you know, anybody who's been listening to us, we've been actually predicting a soft landing and a strong economy for 2 years now. So, and here, here we are. Here we are. It's a, you know, and then data just keeps saying the same thing. So we told you so.

Yeah. I mean, and it's, it's, you know, the same reasons we've been saying for a while. One, it's a strong labor market. Right. And so we've, we've shared these charts in the past, which you could check out the episodes if you haven't listened to them, but there's a huge jobs gap. Gap. The number of job openings that are available right now relative to the number of people seeking employment is a very, very large gap. And it's not something that we've seen a whole lot for, you know, historically. And it's continued to be an issue. And we think it's going to continue to remain an issue from a structural challenge in the labor markets. And then on top of that, strong consumer spending. Right? We've been saying that consumers healthy, they have real wage growth. They are very comfortable in their current debt commitments. And even though sentiment is low, right? And this is one of these weird paradoxes of consumers just have pretty low sentiment, not a whole lot of excitement about the economy. They're not spending like it and they continue to spend pretty aggressively. And so for you know, really those two reasons plus other things, it's continued to drive GDP, uh, very, very high, higher than expected.

Let me make an observation, because every time we say the economy, the consumer is super strong, you know, we get pushback. You know, people saying, well, wait a minute, inflation, people are suffering. And absolutely right. So the bottom kind of quartile of earners are really, really suffering, but they're the smallest component of the economy. So if you talk about the economy, it's on fire. It's doing very, very, very well. Everything about it is showing strength right now in the United States numbers. It doesn't mean people aren't suffering, you know, so there are a lot of people suffering and the, you know, that the, you know, just a lot of people under stress right now at the lower end. So, but again, that's not the economy. That's one segment of the economy that has less impact. Again, I'm just being dispassionate here and being pure, pure data, data-driven, right?

It's, it's a great point to make, right? Because we do see these kind of mixed signals sometimes. And so, well, which is it? Well, it's both, right? And you have to look at things at the scale that they are. And I think that's where sometimes people miss it, where confused. And, and that's also probably what's leading to a lot of the lower sentiment, right? Is, is you're going to the grocery store and you're paying 30% more than you were you know, 6 months ago and you, and it feel the pain of that. So it's, it's definitely a real thing. But real wage growth has continued to rise very, very high. And in general, across the board averages averaging out, you know, most of the consumers are in a really good position. So with that kind of backdrop, we just saw the Fed decided to hold rates steady. And it's kind of funny. I mean, I feel like most election years people are kind of like, okay, it's going to be election year. We'll just make it through. But I feel like this time more than ever, it's just, I want to put my head in the sand and just get over it. But, you know, it's just adding the politics into all this just gets so interesting, right? Because the Federal Reserve is an independent, you know, agency and body that is not politically, um, you know, impacted, but they still are the ones that are driving a lot of, uh, the expectations in the economy. And the, uh, political powers that be want to continue to perform well for their party or perform poorly if they're running against that party. So it's— it creates a lot of, um, just layers of, of, uh, interesting dynamics as we go into this. So you want to unpack some of that for us? Yeah.

So, so, you know, what's happening, of course, we had this massive inflation and stimulus, which is from the stimulus, which has caused the Fed to, of course, raise rates to kind of slow everything down. And they've paused now. And we're hoping for, you know, inflation to come down to their 2% mark and for the economy to start to slow, job losses to increase. And it really hasn't happened. So it looks like a soft landing. Inflation is approaching their target, but still, what, 50% higher or more from their target? And that's— and they're, they're dead set on their target. So, so, so here's, here's the risk. If they, they don't want to miss again, they don't want to cut rates too early and then have everything start popping again and reenergizing inflation. They don't want to do that. And, and so they don't want to cut early and, and they, but they also, real interest rates are, have gone very, very high and, and they've, meaning real after adjusting for inflation, real interest rates are, are really hitting a very high mark. And so they don't want to cause a lot of damage either in the economy. So, so they're, they're trying to walk this tightrope. Now they, they claim and they're insisting that they're politically independent. And they're going to make, make their decision based on data alone. Okay. And good for them, you know. So, so they're going to do that. But I'm telling you, the pressure on them is unreal, you know. So the— who's the, the, the chairman of the, the, the Senate Banking, uh, Committee, you know, um, a Democrat who's up for reelection, of course, and, um, putting pressure on the Fed and telling the Fed, you got to cut rates for affordable housing, right? You You gotta make housing affordable. And so rates have to be cut. And it is, and believe it or not, it's a precedent, right? You, you, you, you saw the, the Fed cut, cut rates in 2020. The Fed cut, cut rates in, you know, in election years, in 2004 to help George Bush get elected. They helped Barack Obama get elected and 2012, in 2020, it started with this, you know, this— we started the bond buying program when the pandemic erupted. So the truth is, there, you know, this is the boss. The president's your boss.

Yeah. You have a little wrinkle into this is the one who appoints the Fed chair is the president. Right?

Right.

So Jerome Powell's term will come up during the next presidency.

So, so does anyone believe that Biden has not, you know, reached out to the Fed chairman?

Right. Okay.

So, you know, he's been busy touting Bidenomics and, you know, no one's really buying that. Um, and he's behind in the polls. He's behind in the polls. You know, pretty much all the polls show Biden losing. Now the end, but he's still the most powerful human being on the earth. Right? And so is he going to just, oh well, you know, I guess we lost, you know, it's not going to happen. Right? So the question is, what will the Fed do? And, and, but I'll tell you, all indications are the Fed is, is holding steady and is, it is being data-driven, but you got to believe the pressure is, is building. And I'll, I'll tell you my take. I'll tell you my take. And this is just purely a guess and speculation. I think they will, they will lower rates slightly. So it's enough, it's to give a nod, to give, to give a nod to, to, you know, oh, things are better, we're getting lower to our inflation targets, and it's, it's going to appease all the political pressure but without materially changing. So I don't think they'll lower much. I think they'll lower just like teeny tiny bit, you know, and continue to wait until 2025. So that's just my speculation, you know, and, and we'll see what, what happens. Yeah.

So, so I mean, the, the yield curve is already kind of pricing in some expected rate cuts this year, right? And I think it's—

which I think, I think is optimistic, maybe.

Yeah. Well, I think that's kind of what I wanted to ask you is, do you think I heard another like big-time economist. I'm not going to say his name because I don't remember exactly how many cuts he predicted, but very well known. He was predicting, I believe it was 4 or 5 rate cuts this year. I'm just like, I don't see that. No way. I don't see that.

I wonder if he's still predicting that after the GDP print and after the jobs, you know?

Yeah, but I think it does beg the question of, okay, the expectation is that rates are already going to be cut this year. So that's kind of baseline that Powell has to work against already. So does he further succumb to more pressure of less work? That's what the market's already pricing in, Jerome. You know, says Mr. Biden, so you need to go even more aggressive than that. Or do you think, you know, he can hold the line of, well, that's, you know, where we think we're going. And, you know, 1 or 2 25 basis point cuts gets the job done. Or do you think there's it potentially puts more pressure to make— do more rate cuts even this year.

Well, if you look at what they're saying, he has never, never waffled on this. I want 2% PCE, core PCE inflation, 2% core PCE. He has never waffled. Well, we're not close to 2%, 2%. So it's come down very rapidly. Okay. And as we pointed out, well, it came down with oil and it came down for a number of reasons, but you've got this underlying pressure of jobs and energy that are going to be very difficult to lower core PCE because those are kind of underlying drivers of inflation that are systemic. Now, I do think energy— I think we're going to see, you know, continued weakness in energy through 2024. So that's going to help. And we've talked about the, the housing component coming down, the rent components coming down. That's going to help. So I do think we'll see core PCE continue to drop. Will it drop to 2? I think that's going to be a real tough reach. I think it's going to be really tough. It's possible that it'll get close, possible it'll touch it. But again, jobs and the wages are just, they're not going down anytime soon. And think about how wages underlie everything, right? Everything. And so even though it's not a component of core PCE, it's a subcomponent of every part of core PCE. So, and then it, as our energy crisis unfolds in the next few years, as we've been predicting, you know, then it's all off the table. So, if you go by what they're saying, they're not going to lower or lower much. And especially if you keep having these kind of, you know, burning hot jobs prints and GDP prints, they're going to, that's going to make you super nervous. You do want to cut and then have inflation take off again. That's going to be embarrassing. They don't want to do that. Yep. Oh, yeah.

All eyes are on the Fed. And I would not— I would not want to be Jerome Powell this year, that's for sure. A lot of scrutiny, a lot of pressure. And we'll continue to kind of keep this as a recurring theme that we'll address as things kind of happen throughout the year, because I do think it's going to be interesting to see how it plays out. But As of now, I mean, maybe he can hold steady and withstand the pressure and very, very curious to see. So thanks so much for joining this episode. Hope you got some value out of it. Obviously, if you're enjoying it, please subscribe, rate the show, helps us just continue to get in front of more people and be sure to tune in for the next episode. See you then.