It's Official: Interest Rate Cuts Are (Almost) Here
Published: 2024-08-24
Status:
Available
|
Analyzed
Published: 2024-08-24
Status:
Available
|
Analyzed
Predictions from this Video
Incorrect: 0
Prediction
Topic
Status
The Federal Reserve is justified in starting to lower interest rates due to falling inflation and rising unemployment, aiming to stimulate the economy and encourage spending.
"He says that now it is the time because number one, inflation has fallen, and number two, unemployment numbers are going up, which justifies the Federal Reserve Bank to start stimulating the economy through lower interest rates to get people to start spending money again."
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Historically, raising interest rates to fight inflation has led to recession and increased unemployment. The Federal Reserve aims to avoid this outcome in the current economic cycle.
"Meaning in the past, if you look at the last number of decades when the Federal Reserve Bank has raised interest rates to fight inflation, what happened? We'd see a recession. We'd see unemployment jump, the Federal Reserve Bank chairman is saying he wants to avoid that this time around."
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Jerome Powell states that the time has come to cut interest rates due to decreasing inflation and increasing unemployment, in order to prevent further economic deterioration.
"Now, because of inflation coming down, because unemployment is going up, this is why Jerome Powell says that it is time to start cutting interest rates as a way to not let the economy get any worse."
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When the Federal Reserve cuts interest rates, interest rates on savings accounts (including high yield) and CDs are expected to decrease.
"So now if you were to put your money in the bank, whether it's in a high yield savings account, a regular savings account, a certificate of deposit, CD, now those rates are going to fall."
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A decrease in Federal Reserve interest rates is likely to lead to lower mortgage rates, car loan rates, refinance rates, and credit card debt rates, with the intention of stimulating consumer spending.
"But if mortgage rates get affected by this, which they very likely would, that means that mortgage rates could go down, your car loan rates could go down, your refinance rates could go down, your credit card debt rates could go down, which the purpose behind this is to stimulate spending."
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The US government favors inflation as it reduces the real value of its substantial national debt, allowing it to be repaid with less valuable dollars.
"The government wants inflation because they have $35 trillion worth of national debt. And inflation means that the value of the dollars are dropping, which means the value of this $35 trillion with the debt goes down because the government can then pay it back with cheaper dollars. They essentially want to inflate away the value of this debt."
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In the last five years, the S&P 500 has outperformed the rise in general prices, wages, and expenses, indicating significant growth.
"Over the last 5 years, we've seen inflation happen, which has caused the prices of things to rise faster than wages. But the S&P 500 has grown even faster than that. The S&P 500 has grown faster than people's incomes. The S&P 500 has grown faster than expenses."
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Low interest rates can lead to the proliferation of 'zombie companies' – businesses that are not profitable but survive due to easy access to debt and capital.
"And then you start to see the growth of things like zombie companies. Zombie companies are companies that don't make money, but they're continuing to operate because they have access to a lot of debt and a lot of venture capital and a lot of angel capital because investors have just a lot of money to spend."
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Commercial real estate debt, which was often refinanced in 2020-2021 at low interest rates, is scheduled to readjust in 2024.
"They've had readjusting loans. And every single commercial landlord, every single corporation readjusted their debt back in 2020 and 2021 when interest rates were at the lowest levels ever. Well, 2024 is when those debts start to readjust."
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In 2024-2025, corporations and commercial landlords face the risk of their debt readjusting to much higher interest rates (potentially 8%), which could double their debt servicing costs.
"And in 2024, 2025, that debt might be readjusting. At what interest rate? Well, it's going to depend on what the Federal Reserve Bank does. But today, every corporation and every commercial landlord is saying, "Oh my god, I really don't want to have to pay 8% on this same debt because that's going to make our monthly payments double even if we don't increase how much debt we have just because the cost of servicing the debt goes up.""
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The Federal Reserve has shifted its stance, now indicating that interest rate cuts will be justified by inflation heading towards 2%, rather than waiting for it to reach exactly 2%.
"Originally, the Federal Reserve Bank said that they're not going to cut interest rates until we see 2% inflation, but they changed their mind. Now they're saying they just want to see inflation heading towards 2% to then justify cutting interest rates."
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The Federal Reserve has officially signaled that interest rate cuts are imminent.
"But now the Federal Reserve Bank has made it essentially official that they're going to be cutting interest rates soon."
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The upcoming US presidential election in 2024 is noted as a factor that will influence the Federal Reserve Bank.
"Of course, we also have an election coming later in 2024 which impacts the Federal Reserve Bank."
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The Federal Reserve Bank is signaling the start of interest rate cuts.
""The time has come for the central bank to begin lowering interest rates.""
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Jerome Powell stated that falling inflation and rising unemployment are reasons to begin cutting interest rates to prevent further economic decline.
"Now, because of inflation coming down, because unemployment is going up, this is why Jerome Powell says that it is time to start cutting interest rates as a way to not let the economy get any worse."
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Interest rates on savings accounts and new Certificates of Deposit (CDs) are expected to fall when the Federal Reserve cuts interest rates.
"So if you're sitting on cash, not so good news. However, if you already have money in a CD, it wouldn't be affected. If you've locked in that rate, but if you want to get a new CD, the new rates after the rates get cut could be lower."
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Falling interest rates are predicted to lead to lower rates for mortgages, car loans, refinances, and credit card debt, aiming to stimulate consumer spending.
"But if mortgage rates get affected by this, which they very likely would, that means that mortgage rates could go down, your car loan rates could go down, your refinance rates could go down, your credit card debt rates could go down, which the purpose behind this is to stimulate spending."
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The Federal Reserve and the US government desire inflation to occur.
"The Federal Reserve Bank wants inflation to happen. The United States government wants inflation to happen."
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Inflation is desired by the government to devalue the US national debt of $35 trillion, allowing it to be repaid with cheaper dollars.
"The government wants inflation because they have $35 trillion worth of national debt. And inflation means that the value of the dollars are dropping, which means the value of this $35 trillion with the debt goes down because the government can then pay it back with cheaper dollars."
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The S&P 500 has outperformed growth in incomes and expenses over the past five years.
"The S&P 500 has grown even faster than that. The S&P 500 has grown faster than people's incomes. The S&P 500 has grown faster than expenses."
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Low interest rates are expected to foster the growth of 'zombie companies' (unprofitable companies sustained by debt and investment).
"And then you start to see the growth of things like zombie companies. Zombie companies are companies that don't make money, but they're continuing to operate because they have access to a lot of debt and a lot of venture capital and a lot of angel capital because investors have just a lot of money to spend."
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Corporate debt taken out in 2020-2021 at low interest rates is projected to readjust to higher rates in 2024-2025, depending on Federal Reserve actions.
"Meaning, if you are a corporation and you have $100 million worth of debt, you might only be paying 3 or 4% a year in interest because you could get that very cheap debt back in 2020 or 2021. And in 2024, 2025, that debt might be readjusting. At what interest rate? Well, it's going to depend on what the Federal Reserve Bank does."
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Commercial and corporate debts taken out in 2020-2021 at low interest rates are due for readjustment in 2024 and 2025.
"Well, 2024 is when those debts start to readjust. Meaning, if you are a corporation and you have $100 million worth of debt, you might only be paying 3 or 4% a year in interest because you could get that very cheap debt back in 2020 or 2021. And in 2024, 2025, that debt might be readjusting."
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The Federal Reserve has shifted its stance, now indicating that inflation trending towards 2% is sufficient justification for cutting interest rates, rather than waiting for 2% inflation to be achieved.
"The Federal Reserve Bank said that they're not going to cut interest rates until we see 2% inflation, but they changed their mind. Now they're saying they just want to see inflation heading towards 2% to then justify cutting interest rates."
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The Federal Reserve has officially signaled that interest rate cuts are imminent.
"But now the Federal Reserve Bank has made it essentially official that they're going to be cutting interest rates soon."
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Jerome Powell has stated that the time has come to begin cutting interest rates.
"Jerome Powell himself now says that it is time to start cutting interest rates."
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The upcoming US election in 2024 is noted to have an impact on the Federal Reserve.
"Of course, we also have an election coming later in 2024 which impacts the Federal Reserve Bank."
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