The Fed is finally cutting rates by 50BPS at the September meeting BUT not necessarily for the same reasons you are thinking about.
Why are they finally deciding to cut the rates?
Big disconnect between the government’s point of view and the Fed’s
Finally what does it mean for jobs, inflation, mortgage, real estate, stock market and crypto
If you care about your investment portfolio this is your early warning. This rate cut could stimulate the economy and avoid a recession OR could be the spark that ignites a major economic crisis.
Quick Explainer on the Fed
The Board has seven members, called Governors. Each one is chosen by the U.S. president and approved by the Senate, kind of like Supreme Court justices.
They serve long terms—14 years to keep them insulated from politics.
Their job is:
Protect the financial system
Setting interest rates
Their goals are:
Maintain stable pricing: 2% inflation
Maximize Employment: 4% is considered full employment
The Federal Open Market Committee (FOMC) has 12 members: 7 Governors, NY President, 4 Rotating bank presidents. This committee decides whether to raise or lower short‑term interest rates
When the news talks about “the Fed raising rates” or “lowering rates,” it’s these 12 people who make the call. The Fed tries to keep the economy growing steadily without letting it overheat or crash.
They lower the interest rate if the economy is crashing, slowing down dramatically.
Jerome H. Powell, Philip N. Jefferson, Michelle W. Bowman, Michael S. Barr, Lisa D. Cook, Adriana D. Kugler, Christopher J. Waller,
John Williams (NY)
Austan D. Goolsbee, Susan M. Collins, Alberto G. Musalem, Jeffrey R. Schmid
Details
Daly, Kashkari, Waller
What are they saying:
Softening economy
Very low job creation
Increased Unemployment
GDP lower than expected
GDP = C + B + G + X - I
Inflation not moving
No sign that tariffs are causing inflation
At the July Fed meeting. The committee wasn’t sure about inflation. Will tariffs impact inflation? By how much.
The thing is that if you lower the rate then it will push inflation higher. The fed was not ready to take that risk.
Conclusion is: Fed will likely say: ”Let’s not wait until it’s too late.”
Trump demanded that the Fed cut the rate. But why? Trump is telling everybody how great the economy is doing so why should the Fed stimulate the economy by lowering rates.
Trump is a Crypto guy now. And Lower interest means Higher crypto prices
Trump has a lot of commercial loans. Many of these commercial loans have flexible rates dependent on the prime rate + points.
Comparing fed rates of other countries.
Mortgage Rates
What drives mortgage rates?
Inflation expectations
Bond Market (10yr)
Investor appetites
Economic Outlook
Mortgage rates = long-term bets on future inflation + risk.
How it plays out with the Fed?
If the Fed cuts rates due to recession fear -> Mortgage usually drops because people don’t want to invest, buy houses etc so demand for mortgage drops
Fed Cuts rates but inflation stays high -> Mortgage rates may stay high or even rise because lenders will ask themselves. “Will I get paid back in full and what is the real value of the future dollars. So demand higher yield”
Winners and Losers
Winners:
Borrowers
Stock Market but delusional
Real Estate Investors
Crypto: Bitcoin
Exporter because US dollar weaker
Losers:
Savers and retirees
Bond Investors
Consumer: US Dollar weaker means imports pricier
Homeowners
Crypto: stablecoin (Company) Circle profit goes down as yield goes down.
Bonus & Twists
We are at a crossroads. There are so many variables on the table that it is impossible to predict which direction it will take. But let’s take a shot. That's why I am paid the big bucks.
Before the Fed decision we will have 2 new datapoints: Labor report and Inflation report.
If the Unemployment goes down then the Fed will NOT cut rates
If the Unemployment goes Up and the inflation remains stable then the Fed will cut the rate
If the Unemployment goes Up and the inflation goes up then the Fed will NOT cut the rates
The stock market is not the economy. Currently it is delusional.
They only compare actual earnings with expectations.
Nobody is reading the earnings report GM beat expectation but lost $1.1B in Q2 due to tariffs alone, Ford $750M, etc
All these companies will do all three of these
Pass the tariffs to the consumers -> inflation
Shrinkflation
Lower quality/safety helped by deregulations
Absorb some of the costs -> reduce earnings -> stock price down
Reduce costs and maintain margins with automation/layoffs -> increase unemployment
Expect increase UE and Increase Inflation. That would put the fed in a pickle. Lowering rate would help UE but hurt inflation and holding rate would help inflation but hurt UE.
What to do about it?
Protect your assets. Don’t take undue risks
Diversify across multiple asset classes and go in different directions. If you are sitting around fire, holding a variety of flammable liquids is not going to help you. Have things that can put out the fire too.
Stock Market will crash before the end of the year so be prepared to buy in
Real Estate is a great way to take advantage of lower interest rates, protect against inflation, and has intrinsic value. I like cash flowing rental real estate. That way the rent pays all the bills and the mortgage and you have a little extra cash at the end of the month.
Do not buy a home at this time. Rent and invest in Real estate instead. You are still in real estate.
Buy cryptocurrencies like Bitcoin, ETH.
Avoid stablecoins. USD will go down.
Avoid stablecoin makers like Circle. US treasury yield will go down and so will their profit.
