The Fed Dot Plot & Lower Rates Ahead? | Top of Mind Series

Welcome back to another episode of the Invest Like a Billionaire podcast. I'm your co-host Ben Fraser. Got fellow co-host Bob Fraser on the line today. Juicy news. The Fed just released their sentiment on rates just a few days ago and the market soared. But if you dig in a little bit more, maybe it's not exactly all rosy just yet.

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What was some of the announcement and what's, what's the market thinking right now?

Well, the big thing everybody was waiting on is the dot plot. And the dot plot shows, you know, most, most of the, the, the board there believe that interest rates are going to be cut 3 times this year. So 75 basis points. And it's not, not very changed from what it's been. And but, you know, to go back to, you know, a few weeks back, we talked about, you know, the anticipation of the market and interest rate expectations. The market has been completely wrong. So, you know, from what has actually happened. So, you know, the market continues to believe we're going to see more aggressive declines in interest rates in this season and in past seasons, they've just been— the markets have just been very, very wrong. And so, you know, again, we just— our view is that these, you know, that inflation is just a little bit stickier than people want it to be. And jobs— the economy is a little bit stronger, you know, than we— than they want it to be. So job— the job market is very, very strong. And we continue to see that. We're seeing a little bit of softening in the job market. We're seeing a little bit of easing of inflation, but it's not that— it's not as much as people want. So, so the market had, had dropped in anticipation that because all the strong economic news and higher inflation news that the Fed was going to change their stance, and nothing really changed. So then the market immediately takes off. But, right, but, um, you know, it's, it's really unchanged, and the market is probably going to be wrong. You know, I mean, I think, I think my view is going to not drop this year or drop a little bit, maybe, maybe 25 basis points. So maybe 2, but I kind of doubt it.

Yeah. And what you're referencing is a podcast we did just a few weeks ago where we found some really interesting data that overlaid what the kind of forward curve expectation of interest rates was going to be at different points in history overlaid with the actual interest rates. And just about every case, they were wrong, right? And so it's just important to remember, right, this is the market is from our perspective, holding on to the hope of low interest rates of yesteryear and getting back to kind of the, the normal that we got used to. And if you've been following any of our economic content for a while, you know, we believe that inflation is still going to be sticky. It's going to be stubborn to get back down to that 2% level that the Fed has been holding hard to. And, you know, what you're saying is the market up because the expectation was we've been seeing some numbers on employment, on GDP growth come out recently and they were all higher than expected to the better.

Right.

It was like lower unemployment and higher GDP. And so the market was getting a little bit nervous that, oh man, maybe the Fed's going to change their stance. And as of now, they're not. But I mean, Jerome Powell in into the talk he just gave. He said, hey, this is data we don't like, so we can't just dismiss it. He's admitted that inflation has been stickier than anticipated over the past few months. They're expecting inflation to decline, but it's going to be bumpy and they don't know if those bumps are, you know, the actual trajectory or just kind of a short-term reversal. And so there still is a lot up in the air on where does it really normalize? And if you look at the dot plot, it's basically what are the expectations from different members of the Board of the Federal Reserve? And they kind of share where they think rates are going to be. If you look at the dot plots, they kind of have low, medium, and high expectations. We'll put some of these, these links in the show notes. It's a huge range right now on the high end. You know, it's like maybe, you know, 25 to 50 basis point cuts over the year. On the low end, it's significant, several percentage point cuts, which just again tells you there's, there's not a clear consensus. There's not a strong expectation yet of we know where we're at, we know exactly where we're going to go. And so again, I mean, this is kind of a continuation of the same theme, but investors need to prepare for rates to be higher for longer. Right. And I think that is if you prepare that way and if you kind of use that as the baseline, then if they go down significantly, then, hey, we all benefit. But I think holding on for hope of short-term, you know, rate increases, rate decreases, that's going to massively change everything is really unlikely because, I mean, even if there are 3 rate cuts, 75 basis points like that, that impacts things quite a bit. But interest rates went up, you know, not really 100 basis points, right?

Yeah.

Yeah.

So there's just still a lot to kind of unpack here and to kind of see as it plays out. And that's why all eyes are on the Fed. But our perspective is, you know, don't hold your breath and continue to, you know, pay attention to what the Fed's saying because they're not— they're not conceding it at this point. Right. I mean, it's It's just not baked in now.

And I still think in election year, I think they're not going to be one accused of playing politics. I think it's, it's a question if they reduce rates before the election, you know, November, you know, and, and I think the risk is still to the upside that what if they reduce rates and then inflation starts ticking up again and the strength in the economy and the resilience of the inflation data points out that that could happen. And so the Fed is just— they're going to be slow to move. They don't want to start easing and then have to start raising again. So all those things point to caution and, and we'll see where it goes.

We'll see. But it's probably, probably a good chance that it's not going to happen exactly as people expect it to be right now based on historical data. Right. So we, we have confidence in that. And maybe it's not as, you know, dramatic as they were even saying. But again, I think it's important to be cautious for significant rate cuts. And I shared it the other day, I was listening to some economist that was expecting like 5 or 6 rate cuts this year, like significant reduction. And it's just— I just, I think that's too early, too early to start getting excited about that and to make decisions based off that information. So Yeah, with that, hopefully, you know, hey, you're tracking along and this is helpful and we'll put some links to the show notes for some other podcasts we've done recently on this topic because it's kind of a continuation of some of the things we've been saying and seeing. And, you know, it's important to pay attention with what the Fed is doing and kind of understand where the trajectory of trends are going. But again, we— you got to make long-term decisions and understand the long-term trends, not just these short-term reactions, because things could change very quickly and the Fed can change their tune very quickly too, right? I mean, this is not baked in. So I appreciate you all listening. Hope you enjoy the episode. Be sure not to miss an episode. So hit the subscribe button, make sure you rate, review, share with a friend. We appreciate all that and love our listeners. So thank you guys.