Why the Fed Can’t Save America | Chris Casey on Rates, Debt, Bonds & Inflation
Summary
Federal Reserve Critique: Chris Casey argues that the Federal Reserve has failed in its mission since its inception, likening it to an arsonist acting as a fireman, and questions its necessity and independence.
September Fed Meeting: The upcoming Federal Open Market Committee meeting is highly anticipated due to political tensions and discussions about the Fed's role, with potential impacts on interest rates and market reactions.
Interest Rate Dynamics: Despite market expectations for a rate cut, Casey suggests that current economic data does not support such a move, highlighting the Fed's focus on inflation, employment, and economic output.
Market Reactions: Casey believes the market may not react strongly to Fed-related drama, as it has previously shrugged off similar political influences and tariff discussions.
Inflation Concerns: Casey warns of potential future inflation driven by monetary policy responses to economic downturns, rather than current tariff-related price changes.
Long-term Debt Risks: The U.S. government's fiscal situation, with a massive debt and deficit, could lead to higher long-term interest rates, similar to recent events in the UK.
Investment Strategy: Investors should consider the long-term implications of government debt and potential interest rate increases when constructing their portfolios, particularly regarding long-dated bonds.
Transcript
The Fed since its inception has completely failed in its mission. Right? The reality is the Fed does the exact opposite. Right? It's the it's the classic um example of the arsonist also being the firemen. Right. Hello and welcome to Wealth. I'm Maggie Lake. Joining us today to talk about the challenges facing the Federal Reserve and the outlook for interest rates is Chris Casey, founder and managing director at Windrock Wealth Management. Hey Chris, great to have you on again. Yeah, Maggie, good seeing you again. Thanks for having me on. So September is a notoriously volatile month, especially for bonds. So as we kick things off, uh just want to remind everyone, great time to check in on your portfolio, make sure you are ready for what's ahead. If you'd like a free review with the team at Windrock, just click the link below or head over to wealthyond.comfree. So Chris, Fed meetings are always closely watched, but this time around the conversation seems to be not just about the decision itself, but the actual role of the Fed. Does it need to be reformed? So I I I thought we might want to sort of just set the table and talk a little bit about the what is the purpose of the Fed? what what are they trying to achieve at the FOMC meetings and why is why are we even having a discussion about that? Well, ultimately beats me. I mean, it's you could you could make a very good argument that the Fed since it its inception has completely failed in its mission, right? Um, it was argued that you need that for stability in the banking system. It was argued you would need that to smooth out business cycles. It was argued you would need that to have reasonable rates and to combat inflation. And the reality is the Fed does the exact opposite, right? It's the it's the classic um example of the arsonist also being the firemen, right? They're the one that they're the ones that are causing the problems. And right now, the big issue is not so much the legitimacy of the Fed or how they conduct our business because you could argue they could be replaced by a rule, right? There's one famous like the Taylor rule could replace their decision-making. Um but it's really about their so-called independence or lack thereof. That that's really I think the main issue. It's coming to the forefront really with this meeting of the uh Federal Open Market Committee in two weeks. Yeah. So why why do you think they're failing so spectacularly? Like talk to me a little bit about why you think they're the problem not necessarily the solution. Well, they're set up to fail in a way, right? There there's really because the purpose there's really no reason to have them. And that sounds shocking because most well everyone on this call listening has grown up with the Fed, right? it's just been around forever as far as we remember. Um, but that's not the case. In fact, you look at America's greatest periods of economic growth. You look at America's greatest periods of stable, if not falling prices, it was pre-Fed days. That's exactly when it was. Um, it's no different, I always say, than if you had a committee, because that's what the Fed is, right? It's a it's a committee to set the price of bananas. And if you did that, the price would be all over. you'd have the president, you know, sending tweets, the price of bananas should be lower, and they'd be scrambling to figure out the supply and demand of bananas. But the reality is, I mean, in a way, they're set up to fail. And that's not necessarily being harsh on the Fed. It's it's really being harsh on the institution itself versus, you know, who's who's running it right now or chairpersons because there's really not a big difference if it's a so-called Republican nominee, Democratic one. They all kind of do and say the exact same thing. And if you just look at broad measures, what's the price level done since the institution of the Fed, right? It's been horrific. If you look at uh the variability in business cycles since they introduced the Fed, it's far worse than it was before. So, it's been horrific. So, in some ways, it's not who's running it, right? It's it's the institution itself. Yeah. Well, that it it you know it probably explains a little bit about why we are having these very pointed conversations about the Fed and you know do do we need to take a fresh look at that institution? Why is this September meeting so important? Why do you think all of this seems to be coming to a head now this September? Because I can't remember. It's been a while since there's been a a a meeting that had so many people sort of laser focused on it. Yeah, it's it's probably been at least a year. Famously, you may remember the last Fed meeting before the election last year, they cut rates by 50 basis points. If you look at the data at the time, there was absolutely no reason. So, Trump views that as very politically um motivated, which I I do think it was. There was a rate cut, a smaller rate cut in November, right after the election, but I think that was really just to kind of cover um to cover their actions and make it look like they're so-called independent and it wasn't politically not motivated. So, there's always a lot of attention for the Fed meeting just based on whether or not they're going to cut rates because the market instinctively assumes that's great for the market. So, all eyes are on top of that. But now we also have the drama of Trump being very upset with Powell, Trump trying to get his way with the board um by looking to dismiss uh board member Cook. So there's a lot of things in motion for this particular uh meeting. Yeah. Well, we're going to jump into some of the economics, you know, the sort of fundamental storylines people are watching. Do you worry that any changes at the Fed that seem politically motivated, whether you grade them or not, do you worry about the impact that would have on the markets? Do you think that would upset the markets or do anything to bond yields or do you think this is more of a Washington conversation only? Well, you know, if you asked me this probably a month ago, I probably would be a little bit more concerned about the market's reaction to so-called the Fed drama, what's going on, whether Apollo will stay, whether he's they're going to try to fire him, whether they successfully fire Cook, etc. I'm kind of more of the opinion I think the market may shrug this off, much like they've shrugged off the constant kind of tariff talk about raising rates here or there. I think yes, um, initially people are upset by it. Personally, it doesn't bother me. I'm I'm not personally bothered by um so-called influence and trying to make the Fed less independent because I don't believe they're independent in the first place and Fed chairman have said that in the past or effectively are not. So I'm not too concerned about that. But now I'm kind of the opinion I think when this plays out and remember this won't play out until beyond ne next two weeks for the meeting. We also have all the way until uh Chairman Powell's term expires I believe May 15th of this year or next year. So that is kind of the the the time span of when this drama is going to play out. And I suspect the market will be fairly muted in its reaction to whatever whatever happens. Yeah. And I think and I think something we're going to have to watch is that it seems like it's sort of morphing from this personal battle between Powell and Trump to something a little deeper which is the Fed as an institution of itself which is very interesting and different. um and and maybe eventually we'll have uh you know more of an impact but as you say that's going to play out over some time. Uh so you know back to the meeting in September Fed officials love to say that we are data driven we're watching the data we're data driven. What data are they looking at and is that the same numbers or a set of of you know indicators that they should be focused on? Yeah. Yeah. Well, the data they're looking at is anything that impacts their so-called um mission, right? And they have the so-called dual mandate. It's actually a triple mandate because it's keeping reasonable interest rates. It's maximizing employment. Um it is uh combating inflation, right? Having stable prices. Those are the three missions. And so everything they're looking at, the so-called data ties into that. So on the price uh level they're looking at okay let's look at the CPI inflation rate which is I believe at 2.6 right now they personally favor the personal consumptions expenditures index which is slightly different waitings it's at 2.7 um they're looking at jobs data whether it's the overall unemployment rate at 4.2% whether it's the openings the jolt um report etc. Um, and then the economy ties in directly to that, right? We just had an upward revision for GDP for the second I'm sorry. Yeah, for the second quarter went up to 3.3% annualized versus 3.0. Um, and then so they're looking at the employment data. They're looking at overall economic output. They're looking at inflation rates. And to put that in context of where um interest rates are right now, we have the 10-year I believe at around uh 4.3 and the 2-year around three 3.6. Um so those are reasonable. So if you're looking at data, all the data they have really says do nothing. And in fact, if you plug that data into what I called what I mentioned before, the Taylor rule, which is a 1993 rule proposed by an economist, it would say basically stay the course. you're right where you should be. So, if they truly are data dependent, which I I don't believe they are. I would I in fact if they are, I would call it data reactionary. They're not really data dependent. Um then the the bottom line is they shouldn't be doing anything at this meeting. If you have any questions about how to navigate the current environment, Wealthon can help connect you with a vetted advisor to get a free portfolio review. Just click the link in the description below or head to wealthon.com/free. There's no obligation and it will just take a few minutes of your time. Again, that's wealthy.comfree. Do you what what are the so all these people who are calling for a Fed rate cut and it's not just Trump, right? Some of the Fed governors themselves, some of them are lobbying for the job of pal, granted, but some of them are also making arguments that no, don't wait until it's too late cut. What are they looking at? There's only a couple reasons I could think why they would want to cut um rates, especially with all the the drama that's played out between Trump and Paul. One is that they're scared. It could be that they see in the jobs reports something that really bothers them because I think that's the only weak link in all the data they're looking at. So that that's one possible reason. Another is that and I I should have done a chart on this, maybe I will before this is published, but you can make an argument that the Fed doesn't set rates. And of course, they don't set rates. You know, that's just a a myth. They really only set one rate, the discount rate, the rates that banks borrow from the Fed. And they heavily influence the overnight lending rate, which is late the rate that banks lend to themselves. And that's the one that they're focused on for this upcoming um uh meeting, reducing that rate. Um but they don't influence the entire rate structure. They influence it, but they certainly don't guide it. Right? So, you could argue historically if you look at the federal funds rate, which is the one they're talking about in two weeks, they tend to follow the market. So, if the 2-year rate is 3.6 and the federal funds rate right now is 4.25 to 4.5, you could argue yes, there's a lot of room for them to cut. And traditionally, they have cut when there's a big gap or or increased. They tend to follow the market versus the other way around. Those are two real reasons. The third I could think of was a little bit more conspiratorial, but the Federal Reserve is part of the government. I mean, they and they they're in my mind not independent. And the reality is US government cannot afford higher rates. And so you could make an argument that that's in the back of their mind. They're trying to be accommodative. And they would even justify it like, hey, even if we do this, it's really part of our core mission, right? Because if if rates blow up and the federal government blows up cuz interest expense is already well over a trillion dollars, they would argue, well, everything else is going to be sunk, so we should do this. So, I I could see three reasons they would. I don't think either of them are really all that compelling, but I could see three reasons they would cut rates. Yeah. Yeah. And those interest payments on our huge debt are it's real, right? The higher those rates are, the more money we have to pay just to continue to float that big debt. uh do you worry about if they do cut, if they do listen to those arguments, they do bow to pressure for those who are calling for it. Do you worry about inflation? How does inflation fit into all of this? Well, it plays in there's there's the actually how I think it plays in there is how the market perceives it. So, everyone was expecting higher uh inflation based on the tariffs. I never did. Um I subscribe to the Austrian School of Economics and they have a very simple explanation for inflation. And it's the supply and demand for money, which shouldn't be shocking because we phrase every other price and inflation is you're talking about the price of money. Every other price of a good or service is described in terms of supply and demand. It's the same exact thing with money, right? There's absolutely no difference. So when you the theory being when you had when you have tariffs that are pushing up certain prices is that the entire price level would would would go up. The reality is if you got to pay more for one price, you have less demand and you put downward pressure on other goods and services that are not beholden to the tariffs. And we've seen this. You could actually see charts that are published showing tariff goods versus not tariff growths. The overall demand or the overall effect is fairly negligible, right? So, um I think the market miscalculated and by the way, not just the market, the Fed was expecting inflation. Let's not forget. I think that was an error. I'm more concerned about the inflation that I think will derive from the next downturn when they go back to the playbook and really start gooseing the mice supply again. QE, you know, infinity or whatever you want to call it. But that's at some point that will happen for potentially a couple different reasons. And when it does, it's going to make the inflation we had a couple years ago pale in comparison potentially. Why does it seem like we're now in this inflationary period? Is it just the sort of changing macro landscape and and supply chains? Because we used to worry about deflation even in those even in that period where we had almost zero interest rates. It seemed like everyone was chasing the spectrum of of being stuck in that Japan-like deflationary spiral. Why why all of a sudden now does inflation seem like the risk that we're facing all the time? Well, part of it may be that there's there's no other boogeyman that they need to fight right now. Like what are they really concerned about? um if they are concerned about inflation, if the Fed is, and I don't know if they really are. They seem like they've backed off of it. Um well, there's arguments why they are or not. Let me let me give you one real reason why I think they won't um cut rates, and it ties in directly to inflation. This is kind of a subtle change, but Chairman Powell did suggest recently that they were going to move away from I think what they called uh for lack of better term their their tolerance of different uh metrics they look at. So for instance, you may recall a couple years ago the Federal Reserve came out and says listen inflation's running hot. It's 3 or 4%. But it's kind of making up for the fact that we had it was below our target of 2% for years, right? So we're kind of making up for it right now. That's a stupid argument. It's no different than if I didn't sleep for a week and I had one good night's sleep. Yeah, I'm going to feel better, but it doesn't make up for the sleep I missed. Right? It's the same concept. So there he's basically signaling that they're no longer going to allow um such a large range. So if inflation right now is 2.6 2.7% depending on how you measure it. He's basically arguing that's still too high, right? We're not giving it any leeway to it anymore. Therefore, I would think he would not want to cut rates with that kind of fear. So, I think that's a very telling signal he had recently. Um, especially in the fact that the market is pricing in like a 90% likelihood that they're going to cut rates in two weeks, right? So, it's anything that surprises to the of of not cutting rates could be a big surprise, a downward surprise for the market, but I think that is possible. Yeah. I was just going to ask you like how do you so there was a time when when we would things would be uncertain and you know if you saw sort of an aggressive rate cut or something that was above and beyond or even if you know if people were you know the wait and see was kind of seen as discipline and and that the Fed was you know doing its job. Now everybody celebrates the cut the Fed puts in. um we don't have that like what do they know that we don't maybe things are really weak under the surface that they see and you know that used to be the signal. So, how do you how do you think the market reacts now? Because, you know, if they don't give the, you know, give the candy to the party, it seems like we could have a downturn. But I've also heard arguments that listen, if it looks like they're losing their credibility and independence and are just going to be a political arm of the Trump administration, regardless of how you feel about the Trump administration, that's worrying. and maybe these, you know, sort of especially internationally, people become uncomfortable with that and that could actually put upward pressure on yields um as opposed to, you know, following suit with the Fed. It seems kind of complicated. How are you thinking about the the market reaction here? Well, I do think there's a big risk that that long-term rates go up regardless almost how this plays out because I don't think there's a great answer here. And you're right, there is. is that's another good reason, a couple good reasons why the Fed may not cut. Um, one is just for the so-called appearance of independence, right? They they may view this as, hey, we legitimately um have to assert ourselves or we're risking the dollar, we're risking our reputation, what have you. That that's a good argument. There's also the argument, I mean, everybody's human. Um Paul's being bered by Trump on X to the point where like some of these text messages I mean this is the type of stuff I get from my buddies on fantasy football on Sunday, right? It's like your team is a bunch of losers, you know? It's just it's just silly stuff. Um that's great. But everyone's a h a human, right? And so I I could see just naturally he's not very inclined to accommodate the administration, especially after it's kind of backfiring in a way, right? So there's there's good arguments um why they would not apart from just the data as well. Yeah. So if we pull the lens out how how um you know does this impact portfolio construction like do people uh should they be thinking about doing something with bonds or how you know what kind of conversations do you expect to get from your clients ahead of this or you know because people I think people worry a lot about the volatility which as I said all over the place uh we're seeing through the headlines September is a terrible month for bonds. September is a volatile month. This is September and October when we seasonally have these sort of financial crisis and and you know big crackups. And so there's a I think a lot of fear heading into this time of year. Oh, there absolutely is. And I think just to back up talking about interest rates. I do think there's a couple reasons why rates could go up in the future. One is just look at the rollover period and this is the primary motivation for the Trump administration, right? uh Secretary of Treasury uh Basant a couple months ago came out and said, "Hey, I'm really focused on the short-term rates. I'm primarily when I roll have to roll over our debt situation. It's going to go short term." That's something that they've they've publicly talked about when you have So, it's no surprise that they're trying to jawbone the Fed into lowering short-term rates. That's that's primarily what they need. So, um, historically this is such a volatile time and I think people are nervous going into it and so I'm just wondering, you know, what are the kind of conversations you anticipate having with your clients as you head into this time of year, especially with this big kind of murky unknown Fed meeting looming? Yeah. Well, on top of that, I mean, just look at the fiscal situation for the government. It's $ 37.3 trillion in debt. They're probably going to take in 5.2 2 trillion this year and they're still short one and a half by about one and a half trillion is going to be a deficit. So that that is a massive horrible fiscal situation. If you look at around the world when this has happened in the past, you don't have to look very far temporally. Look at England right now. What's going on in the UK? Uh almost exactly three years ago, they had the so-called guilt episode where um government uh basically went under because they had a new budget proposed. the market realized there's no way they're going to pay this debt back and their yields exploded on their their interest rates exploded on their debt. The same thing is happening right now in England. Almost the exact same thing has played out, right? It's it their 30-year uh bond is up to like 5.6%. If it cracks 6%, that's a major problem. Likewise, I can see the market reacting to the US quite negatively at some point in the future at some point. And I thought this would happen maybe with the passage of the big beautiful bill act. Um maybe it's going to happen if there's any turmoil with pow etc. But the reality is US government could never pay this back. And when they fin the government finally I'm sorry when investors probably finally realize this they will command higher rates. Rates should go up all things being equal. I just don't know the timing on that. But that is kind of a long-term thing everyone should be aware of. So regardless what happens with this Fed meeting, that's something you should keep in the back of your mind when looking at your portfolio because that impacts everything, but especially longdated bonds. Yeah. No, absolutely. And and we're sort of in the in this new period where we're really going to have to wrap our head around that big looming problem um and make sure we're we're ready for it. Chris, thank you so much. This was such a great primer for us all as we head into the September 17th meeting, which as you said is just a couple of weeks away. Um, and gives us all a chance to, as we said at the beginning, make sure we're ready for it. So, if you have any questions about anything you heard or you want to check and see if your allocations make sense given all of this, you can get a free portfolio review with the team at Windrock. Just head over to wealth.comfree. Chris, thanks so much. Thanks to all of you for watching. We'll see you again next time. Thank you. [Music]
Why the Fed Can’t Save America | Chris Casey on Rates, Debt, Bonds & Inflation
Summary
Transcript
The Fed since its inception has completely failed in its mission. Right? The reality is the Fed does the exact opposite. Right? It's the it's the classic um example of the arsonist also being the firemen. Right. Hello and welcome to Wealth. I'm Maggie Lake. Joining us today to talk about the challenges facing the Federal Reserve and the outlook for interest rates is Chris Casey, founder and managing director at Windrock Wealth Management. Hey Chris, great to have you on again. Yeah, Maggie, good seeing you again. Thanks for having me on. So September is a notoriously volatile month, especially for bonds. So as we kick things off, uh just want to remind everyone, great time to check in on your portfolio, make sure you are ready for what's ahead. If you'd like a free review with the team at Windrock, just click the link below or head over to wealthyond.comfree. So Chris, Fed meetings are always closely watched, but this time around the conversation seems to be not just about the decision itself, but the actual role of the Fed. Does it need to be reformed? So I I I thought we might want to sort of just set the table and talk a little bit about the what is the purpose of the Fed? what what are they trying to achieve at the FOMC meetings and why is why are we even having a discussion about that? Well, ultimately beats me. I mean, it's you could you could make a very good argument that the Fed since it its inception has completely failed in its mission, right? Um, it was argued that you need that for stability in the banking system. It was argued you would need that to smooth out business cycles. It was argued you would need that to have reasonable rates and to combat inflation. And the reality is the Fed does the exact opposite, right? It's the it's the classic um example of the arsonist also being the firemen, right? They're the one that they're the ones that are causing the problems. And right now, the big issue is not so much the legitimacy of the Fed or how they conduct our business because you could argue they could be replaced by a rule, right? There's one famous like the Taylor rule could replace their decision-making. Um but it's really about their so-called independence or lack thereof. That that's really I think the main issue. It's coming to the forefront really with this meeting of the uh Federal Open Market Committee in two weeks. Yeah. So why why do you think they're failing so spectacularly? Like talk to me a little bit about why you think they're the problem not necessarily the solution. Well, they're set up to fail in a way, right? There there's really because the purpose there's really no reason to have them. And that sounds shocking because most well everyone on this call listening has grown up with the Fed, right? it's just been around forever as far as we remember. Um, but that's not the case. In fact, you look at America's greatest periods of economic growth. You look at America's greatest periods of stable, if not falling prices, it was pre-Fed days. That's exactly when it was. Um, it's no different, I always say, than if you had a committee, because that's what the Fed is, right? It's a it's a committee to set the price of bananas. And if you did that, the price would be all over. you'd have the president, you know, sending tweets, the price of bananas should be lower, and they'd be scrambling to figure out the supply and demand of bananas. But the reality is, I mean, in a way, they're set up to fail. And that's not necessarily being harsh on the Fed. It's it's really being harsh on the institution itself versus, you know, who's who's running it right now or chairpersons because there's really not a big difference if it's a so-called Republican nominee, Democratic one. They all kind of do and say the exact same thing. And if you just look at broad measures, what's the price level done since the institution of the Fed, right? It's been horrific. If you look at uh the variability in business cycles since they introduced the Fed, it's far worse than it was before. So, it's been horrific. So, in some ways, it's not who's running it, right? It's it's the institution itself. Yeah. Well, that it it you know it probably explains a little bit about why we are having these very pointed conversations about the Fed and you know do do we need to take a fresh look at that institution? Why is this September meeting so important? Why do you think all of this seems to be coming to a head now this September? Because I can't remember. It's been a while since there's been a a a meeting that had so many people sort of laser focused on it. Yeah, it's it's probably been at least a year. Famously, you may remember the last Fed meeting before the election last year, they cut rates by 50 basis points. If you look at the data at the time, there was absolutely no reason. So, Trump views that as very politically um motivated, which I I do think it was. There was a rate cut, a smaller rate cut in November, right after the election, but I think that was really just to kind of cover um to cover their actions and make it look like they're so-called independent and it wasn't politically not motivated. So, there's always a lot of attention for the Fed meeting just based on whether or not they're going to cut rates because the market instinctively assumes that's great for the market. So, all eyes are on top of that. But now we also have the drama of Trump being very upset with Powell, Trump trying to get his way with the board um by looking to dismiss uh board member Cook. So there's a lot of things in motion for this particular uh meeting. Yeah. Well, we're going to jump into some of the economics, you know, the sort of fundamental storylines people are watching. Do you worry that any changes at the Fed that seem politically motivated, whether you grade them or not, do you worry about the impact that would have on the markets? Do you think that would upset the markets or do anything to bond yields or do you think this is more of a Washington conversation only? Well, you know, if you asked me this probably a month ago, I probably would be a little bit more concerned about the market's reaction to so-called the Fed drama, what's going on, whether Apollo will stay, whether he's they're going to try to fire him, whether they successfully fire Cook, etc. I'm kind of more of the opinion I think the market may shrug this off, much like they've shrugged off the constant kind of tariff talk about raising rates here or there. I think yes, um, initially people are upset by it. Personally, it doesn't bother me. I'm I'm not personally bothered by um so-called influence and trying to make the Fed less independent because I don't believe they're independent in the first place and Fed chairman have said that in the past or effectively are not. So I'm not too concerned about that. But now I'm kind of the opinion I think when this plays out and remember this won't play out until beyond ne next two weeks for the meeting. We also have all the way until uh Chairman Powell's term expires I believe May 15th of this year or next year. So that is kind of the the the time span of when this drama is going to play out. And I suspect the market will be fairly muted in its reaction to whatever whatever happens. Yeah. And I think and I think something we're going to have to watch is that it seems like it's sort of morphing from this personal battle between Powell and Trump to something a little deeper which is the Fed as an institution of itself which is very interesting and different. um and and maybe eventually we'll have uh you know more of an impact but as you say that's going to play out over some time. Uh so you know back to the meeting in September Fed officials love to say that we are data driven we're watching the data we're data driven. What data are they looking at and is that the same numbers or a set of of you know indicators that they should be focused on? Yeah. Yeah. Well, the data they're looking at is anything that impacts their so-called um mission, right? And they have the so-called dual mandate. It's actually a triple mandate because it's keeping reasonable interest rates. It's maximizing employment. Um it is uh combating inflation, right? Having stable prices. Those are the three missions. And so everything they're looking at, the so-called data ties into that. So on the price uh level they're looking at okay let's look at the CPI inflation rate which is I believe at 2.6 right now they personally favor the personal consumptions expenditures index which is slightly different waitings it's at 2.7 um they're looking at jobs data whether it's the overall unemployment rate at 4.2% whether it's the openings the jolt um report etc. Um, and then the economy ties in directly to that, right? We just had an upward revision for GDP for the second I'm sorry. Yeah, for the second quarter went up to 3.3% annualized versus 3.0. Um, and then so they're looking at the employment data. They're looking at overall economic output. They're looking at inflation rates. And to put that in context of where um interest rates are right now, we have the 10-year I believe at around uh 4.3 and the 2-year around three 3.6. Um so those are reasonable. So if you're looking at data, all the data they have really says do nothing. And in fact, if you plug that data into what I called what I mentioned before, the Taylor rule, which is a 1993 rule proposed by an economist, it would say basically stay the course. you're right where you should be. So, if they truly are data dependent, which I I don't believe they are. I would I in fact if they are, I would call it data reactionary. They're not really data dependent. Um then the the bottom line is they shouldn't be doing anything at this meeting. If you have any questions about how to navigate the current environment, Wealthon can help connect you with a vetted advisor to get a free portfolio review. Just click the link in the description below or head to wealthon.com/free. There's no obligation and it will just take a few minutes of your time. Again, that's wealthy.comfree. Do you what what are the so all these people who are calling for a Fed rate cut and it's not just Trump, right? Some of the Fed governors themselves, some of them are lobbying for the job of pal, granted, but some of them are also making arguments that no, don't wait until it's too late cut. What are they looking at? There's only a couple reasons I could think why they would want to cut um rates, especially with all the the drama that's played out between Trump and Paul. One is that they're scared. It could be that they see in the jobs reports something that really bothers them because I think that's the only weak link in all the data they're looking at. So that that's one possible reason. Another is that and I I should have done a chart on this, maybe I will before this is published, but you can make an argument that the Fed doesn't set rates. And of course, they don't set rates. You know, that's just a a myth. They really only set one rate, the discount rate, the rates that banks borrow from the Fed. And they heavily influence the overnight lending rate, which is late the rate that banks lend to themselves. And that's the one that they're focused on for this upcoming um uh meeting, reducing that rate. Um but they don't influence the entire rate structure. They influence it, but they certainly don't guide it. Right? So, you could argue historically if you look at the federal funds rate, which is the one they're talking about in two weeks, they tend to follow the market. So, if the 2-year rate is 3.6 and the federal funds rate right now is 4.25 to 4.5, you could argue yes, there's a lot of room for them to cut. And traditionally, they have cut when there's a big gap or or increased. They tend to follow the market versus the other way around. Those are two real reasons. The third I could think of was a little bit more conspiratorial, but the Federal Reserve is part of the government. I mean, they and they they're in my mind not independent. And the reality is US government cannot afford higher rates. And so you could make an argument that that's in the back of their mind. They're trying to be accommodative. And they would even justify it like, hey, even if we do this, it's really part of our core mission, right? Because if if rates blow up and the federal government blows up cuz interest expense is already well over a trillion dollars, they would argue, well, everything else is going to be sunk, so we should do this. So, I I could see three reasons they would. I don't think either of them are really all that compelling, but I could see three reasons they would cut rates. Yeah. Yeah. And those interest payments on our huge debt are it's real, right? The higher those rates are, the more money we have to pay just to continue to float that big debt. uh do you worry about if they do cut, if they do listen to those arguments, they do bow to pressure for those who are calling for it. Do you worry about inflation? How does inflation fit into all of this? Well, it plays in there's there's the actually how I think it plays in there is how the market perceives it. So, everyone was expecting higher uh inflation based on the tariffs. I never did. Um I subscribe to the Austrian School of Economics and they have a very simple explanation for inflation. And it's the supply and demand for money, which shouldn't be shocking because we phrase every other price and inflation is you're talking about the price of money. Every other price of a good or service is described in terms of supply and demand. It's the same exact thing with money, right? There's absolutely no difference. So when you the theory being when you had when you have tariffs that are pushing up certain prices is that the entire price level would would would go up. The reality is if you got to pay more for one price, you have less demand and you put downward pressure on other goods and services that are not beholden to the tariffs. And we've seen this. You could actually see charts that are published showing tariff goods versus not tariff growths. The overall demand or the overall effect is fairly negligible, right? So, um I think the market miscalculated and by the way, not just the market, the Fed was expecting inflation. Let's not forget. I think that was an error. I'm more concerned about the inflation that I think will derive from the next downturn when they go back to the playbook and really start gooseing the mice supply again. QE, you know, infinity or whatever you want to call it. But that's at some point that will happen for potentially a couple different reasons. And when it does, it's going to make the inflation we had a couple years ago pale in comparison potentially. Why does it seem like we're now in this inflationary period? Is it just the sort of changing macro landscape and and supply chains? Because we used to worry about deflation even in those even in that period where we had almost zero interest rates. It seemed like everyone was chasing the spectrum of of being stuck in that Japan-like deflationary spiral. Why why all of a sudden now does inflation seem like the risk that we're facing all the time? Well, part of it may be that there's there's no other boogeyman that they need to fight right now. Like what are they really concerned about? um if they are concerned about inflation, if the Fed is, and I don't know if they really are. They seem like they've backed off of it. Um well, there's arguments why they are or not. Let me let me give you one real reason why I think they won't um cut rates, and it ties in directly to inflation. This is kind of a subtle change, but Chairman Powell did suggest recently that they were going to move away from I think what they called uh for lack of better term their their tolerance of different uh metrics they look at. So for instance, you may recall a couple years ago the Federal Reserve came out and says listen inflation's running hot. It's 3 or 4%. But it's kind of making up for the fact that we had it was below our target of 2% for years, right? So we're kind of making up for it right now. That's a stupid argument. It's no different than if I didn't sleep for a week and I had one good night's sleep. Yeah, I'm going to feel better, but it doesn't make up for the sleep I missed. Right? It's the same concept. So there he's basically signaling that they're no longer going to allow um such a large range. So if inflation right now is 2.6 2.7% depending on how you measure it. He's basically arguing that's still too high, right? We're not giving it any leeway to it anymore. Therefore, I would think he would not want to cut rates with that kind of fear. So, I think that's a very telling signal he had recently. Um, especially in the fact that the market is pricing in like a 90% likelihood that they're going to cut rates in two weeks, right? So, it's anything that surprises to the of of not cutting rates could be a big surprise, a downward surprise for the market, but I think that is possible. Yeah. I was just going to ask you like how do you so there was a time when when we would things would be uncertain and you know if you saw sort of an aggressive rate cut or something that was above and beyond or even if you know if people were you know the wait and see was kind of seen as discipline and and that the Fed was you know doing its job. Now everybody celebrates the cut the Fed puts in. um we don't have that like what do they know that we don't maybe things are really weak under the surface that they see and you know that used to be the signal. So, how do you how do you think the market reacts now? Because, you know, if they don't give the, you know, give the candy to the party, it seems like we could have a downturn. But I've also heard arguments that listen, if it looks like they're losing their credibility and independence and are just going to be a political arm of the Trump administration, regardless of how you feel about the Trump administration, that's worrying. and maybe these, you know, sort of especially internationally, people become uncomfortable with that and that could actually put upward pressure on yields um as opposed to, you know, following suit with the Fed. It seems kind of complicated. How are you thinking about the the market reaction here? Well, I do think there's a big risk that that long-term rates go up regardless almost how this plays out because I don't think there's a great answer here. And you're right, there is. is that's another good reason, a couple good reasons why the Fed may not cut. Um, one is just for the so-called appearance of independence, right? They they may view this as, hey, we legitimately um have to assert ourselves or we're risking the dollar, we're risking our reputation, what have you. That that's a good argument. There's also the argument, I mean, everybody's human. Um Paul's being bered by Trump on X to the point where like some of these text messages I mean this is the type of stuff I get from my buddies on fantasy football on Sunday, right? It's like your team is a bunch of losers, you know? It's just it's just silly stuff. Um that's great. But everyone's a h a human, right? And so I I could see just naturally he's not very inclined to accommodate the administration, especially after it's kind of backfiring in a way, right? So there's there's good arguments um why they would not apart from just the data as well. Yeah. So if we pull the lens out how how um you know does this impact portfolio construction like do people uh should they be thinking about doing something with bonds or how you know what kind of conversations do you expect to get from your clients ahead of this or you know because people I think people worry a lot about the volatility which as I said all over the place uh we're seeing through the headlines September is a terrible month for bonds. September is a volatile month. This is September and October when we seasonally have these sort of financial crisis and and you know big crackups. And so there's a I think a lot of fear heading into this time of year. Oh, there absolutely is. And I think just to back up talking about interest rates. I do think there's a couple reasons why rates could go up in the future. One is just look at the rollover period and this is the primary motivation for the Trump administration, right? uh Secretary of Treasury uh Basant a couple months ago came out and said, "Hey, I'm really focused on the short-term rates. I'm primarily when I roll have to roll over our debt situation. It's going to go short term." That's something that they've they've publicly talked about when you have So, it's no surprise that they're trying to jawbone the Fed into lowering short-term rates. That's that's primarily what they need. So, um, historically this is such a volatile time and I think people are nervous going into it and so I'm just wondering, you know, what are the kind of conversations you anticipate having with your clients as you head into this time of year, especially with this big kind of murky unknown Fed meeting looming? Yeah. Well, on top of that, I mean, just look at the fiscal situation for the government. It's $ 37.3 trillion in debt. They're probably going to take in 5.2 2 trillion this year and they're still short one and a half by about one and a half trillion is going to be a deficit. So that that is a massive horrible fiscal situation. If you look at around the world when this has happened in the past, you don't have to look very far temporally. Look at England right now. What's going on in the UK? Uh almost exactly three years ago, they had the so-called guilt episode where um government uh basically went under because they had a new budget proposed. the market realized there's no way they're going to pay this debt back and their yields exploded on their their interest rates exploded on their debt. The same thing is happening right now in England. Almost the exact same thing has played out, right? It's it their 30-year uh bond is up to like 5.6%. If it cracks 6%, that's a major problem. Likewise, I can see the market reacting to the US quite negatively at some point in the future at some point. And I thought this would happen maybe with the passage of the big beautiful bill act. Um maybe it's going to happen if there's any turmoil with pow etc. But the reality is US government could never pay this back. And when they fin the government finally I'm sorry when investors probably finally realize this they will command higher rates. Rates should go up all things being equal. I just don't know the timing on that. But that is kind of a long-term thing everyone should be aware of. So regardless what happens with this Fed meeting, that's something you should keep in the back of your mind when looking at your portfolio because that impacts everything, but especially longdated bonds. Yeah. No, absolutely. And and we're sort of in the in this new period where we're really going to have to wrap our head around that big looming problem um and make sure we're we're ready for it. Chris, thank you so much. This was such a great primer for us all as we head into the September 17th meeting, which as you said is just a couple of weeks away. Um, and gives us all a chance to, as we said at the beginning, make sure we're ready for it. So, if you have any questions about anything you heard or you want to check and see if your allocations make sense given all of this, you can get a free portfolio review with the team at Windrock. Just head over to wealth.comfree. Chris, thanks so much. Thanks to all of you for watching. We'll see you again next time. Thank you. [Music]