Capitalist Investor

Fed Rate Cuts Explained: Economic Growth and Inflation Risks, Ep. 288

• Strategic Wealth Partners

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In this week's episode of the Capitalist Investor, Derek and Tony dive into the looming concern of price increases as the Federal Reserve considers cutting interest rates. With Luke away on assignment, Derek and Tony discuss Jerome Powell's cautious approach, the history of rate cuts and inflation from the 1970s, and the potential economic implications of such decisions. They also explore the possibility of a soft landing for the economy amid these turbulent times, the questionable accuracy of job market numbers, and the ever-persistent issue of inflation. Tune in for a dynamic conversation on what these financial shifts could mean for investors and the broader economy. Don't forget to like, comment, and subscribe for more insights!

1. The Potential Impact of Fed Rate Cuts
One of the central themes in this episode is the Federal Reserve's upcoming decision on interest rate cuts. Derek and Tony explore the historical context, noting the caution exercised by Jerome Powell to avoid repeating the mistakes of the 1970s that triggered massive inflation. The hosts emphasize that while lower rates can stimulate spending, they can also drive up prices if not managed carefully.
2. Inflation and Economic Growth Dynamics
Inflation remains a key concern. The intriguing statistic mentioned by Tony—an 85% chance of renewed inflation if it exceeds 6%—highlights the precarious balance the Fed must maintain. The duo discusses how lowering the rates can lead to lower yields and savings, thereby increasing consumer spending, which could paradoxically spike inflation.
3. Job Market Revisions
Derek touches on a fascinating, albeit concerning, issue regarding the frequent downward revisions of job market numbers. He questions the accuracy and motivations behind these adjustments, suggesting a possible link to political maneuvering. This topic adds a layer of intrigue, as it raises doubts about the reliability of the data used to gauge economic health.
4. The Elusive Soft Landing
The concept of a "soft landing" is scrutinized extensively. The idea here is for the Fed to carefully navigate economic conditions to avoid a recession while managing inflation. Tony shares insights from his investment team, suggesting that historical trends make a perfect soft landing unlikely. They discuss the unprecedented situation of potential rate cuts occurring alongside expected double-digit earnings growth in stocks.
5. Market Reactions to Rate Cut Speculations
Finally, the unpredictable nature of market reactions to rate cut speculations is a point of concern. Tony points out the abrupt swing in probability for a more substantial rate cut—from 2% to 67%—within a mere couple of days. The hosts discuss various scenarios, including the dramatic idea of a 1% rate cut suggested by Mark on Fox, and what such drastic measures might signal about the Fed’s confidence in the economy.
Conclusion
This episode of the Capitalist Investor offers a wealth of insights into current economic challenges and debates. Whether you’re an investor or simply keen on understanding the economic landscape, these five hot topics provide a nuanced look at what’s at stake and the different factors at play in shaping our financial future.
Make sure to tune into the episode for a more detailed analysis and keep yourself informed about these critical issues. If you have any questions or suggestions, feel free to reach out to the hosts at swpconnect.com.

Hello and welcome to this week's episode of the Capitalist Investor. As always, you have me, diamond hands d, and Luke is out on assignment this week. So we have Tony the tiger as well. What's going on, man? What's up, man? How are you doing? Oh, you know, can't complain too much. All right. Weather's still nice here in northeast Ohio, so that's pretty good. Always. It's turning, though. I don't know. You know what? The summer wasn't that hot. So it's like I, I don't know if I'm really ready for fall and winter because I never got sick of summer this year. I tell you what, though, with this global warming, the northeast Ohio climate is really improved. Yeah, we get a, basically, we've had January. Yeah, it's wild. Yeah. So that's fantastic. Yeah. And that's why we'll get a 3ft of snow on Thanksgiving this year. Definitely. All right, so today for this episode, we're going to be talking about, you know, there's some, you know, analysts, economists that are warning about price increases based on the Fed's decision to start cutting rates. And we're going to kind of dive into, like, what that means, you know, are they going to cut? So this is being recorded before the rate cuts are announced. So we'll see how right and wrong we are here momentarily. But the premise behind lowering rates and why it's been taking so long and why we have been, what I've been talking about higher for longer is that Jerome Powell, who's in charge of the Fed, is being cautious because back in the seventies there was a rate cut measure that sparked a lot of inflation after the cuts. And the funny thing is that there is a statistic I saw that said there is an 85% chance that when we have inflation over 6%, there is an 85% chance that we will see a spike in inflation again. So is this the catalyst that sparks the inflation? Right. And here's the idea of why this happens. So as rates lower, so do yields. I had this conversation with somebody, I'll just invest in 5% cds. And I'm like, well, let me know how that goes in about a year when they're 3%. Right. Right. Because that's the, that's the Fed's goal is to cut us down to probably about 200 basis points over the next year or so. So that means 5% cds are going to three money markets, five going to three again, that is what's being talked about. But you know what Jerome does and what the market is pricing in are two different things. So lower rates equals lower yields. That means people are going to be saving less because they're not making as much money on their money, they're not making as much interest. So what do they do? They spend more, which then drives up demand because they're going to just start buying things. And that's good for the economy. But that also could spark price raises because of low supply. That is the premise behind lowering the rates and sparking inflation. However, there's the other side of the, you know, the other side of the, of the sword where it goes something along the lines of if we keep rates too high for too long, it suffocates economic growth. But the economy, the United States economy is very slow moving. Animal things that are put into motion today might not be realized for 3612 months. So now again, they're balancing this balancing act, saying, hey, everything's good right now. Next quarter's gdp is supposed to be around 3%. But if you take a look at estimates for 2020 five's gdp, we're looking at 1.7%. That seems like shrinking. Slow growth. It's still growth, but it's slowing. And this is where the balancing act of one man is. A lot of things are on his shoulders and no one's going to be happy. What is your take on this honesty? Yeah, it seems, seems like yesterday basically the all clear was given and everyone was like, hey, well, the rate cuts are starting now and everything's going to be great. And I think the big talking point was soft landing. We've been talking about this for a while where Jerome Powell and the Fed, they're just going to perfectly stick the landing. And they brought interest rates up to combat inflation and now they're going to perfectly time the rate cuts. So there's essentially no recession. So essentially there's no rapid deterioration to the job market. Yeah. Contrarian viewpoint is that he's too early. A lot of people are saying, man, you're way too late. The economy is really struggling. And I'm like, well, on the surface all the numbers look good, but that's funny. You say soft landing. So I was talking to our investment team and our base case is still a soft landing. And here's why is that? Pretty much never in the history of the stock market did we cut over 100 basis points. So cut, you know, making cuts, which usually signals economic weakness, right? Usually. Yet the analysts are expecting earnings growth from stocks to be still in double digit territory next year. So we're growing and cutting at the same time. It's very, it's never happened. Therefore, our base case is a soft landing because they never stick the landing. It's always some kind of, you know, we either accelerate or we hit the ground. Right. And I thought that was pretty interesting. So like, like, yeah, it's just, it's very odd and awkward. So maybe that is an indication of a soft landing. You know, I don't want to get too conspiracy theorists for you. Bring it to me. You know, the job market and I don't have any facts to back this up, but it seems that the revisions down in the job market, so they post whatever numbers about new jobs found or a number of new unemployment claims, whatever the case is, whatever we're measuring, they always put out a revision after the fact. You know, I think it was like three or four weeks ago. They revised the job numbers down by like 890,000 jobs. So to get back to the original point, I don't have a lot of confidence in these numbers that are, that are coming out as well that keep getting revised down. So when you, why do you think that it boggles? Like it's, I think it's like over 70% of all the breedings are of revised down. Yeah. What is going on? Like is this like that Dei stuff like people doing the surveys? It seems very strange, honestly. It really does. And like I don't, I don't have the specific numbers behind it, but yeah. I never remember such drastic revisions. They're drastic. I mean, if you, if a couple thousand, you know, in either direction, we're talking to hundreds of thousands in the wrong direction. So I don't know if it's just some like the conspiracy theories just prop everything up before the elections to like, yep. The incumbents don't look bad. I don't know, man. That's my only conspiracy theory. Like who's in charge of these numbers? Yeah. So comes up with this stuff. Yes. To that point, it doesn't really feel like inflation is, you know, has slowed to the level that, you know, is being described out there in the markets. It doesn't, I know the numbers that are coming out, you know, but it doesn't feel like inflation has essentially gone away, which is kind of what people are trying to say. CPI is still above 3%. It feels like we're going to be there for a long time. You've been talking about that for a while now. I think it's just with us sitting at all time highs, I think it's still a good idea to be a little cautious on what we might see here in the next couple of months. Yeah. And then again, we're recording this before the decision, but you've heard that 25 basis points is what is was being priced in. And then literally a day ago it went, you know, 50 basis points has been talked about and the probability went from 2% to like 67%. Like a day or two ago. It was like a drastic change. I don't know where that came from or what sparked it. So it'll be interesting on what he chooses. And then I heard, you know, I think Mark, you know, Mark was on Fox and just gave a another thing saying, you know, what if, what if he just did 1%, one big jump and say, don't bother me for like four to six months? Yeah, like, get off my back. That'd be wild. Here's, here's a hundred. Get out of my skit. Out of my way. I don't know. Like, that would be pretty drastic, I think. I think the larger the cut, the more fear. I believe it would cause people saying, you know, 25 basis points, oh, everything must be still okay. And the data points are good. Hey, 50 point, like, is everything okay over there? Exactly. Yeah. All right, well, I guess we'll see what happens. But lowering interest rates, there is caution about spiking inflation, and I think we gave some good examples on that, so. Yep, for sure. All right, man. Well, thanks for listening to this episode. If you guys have any questions, comments, show ideas, hit us up at info connect.com and we'll talk to you next week. The opinions expressed in the podcast are for general informational purposes only and are not intended to provide specific advice or recommendations for any investment, legal, financial, or tax strategy. It is only intended to provide education about the financial industry. Please consult a qualified professional about your individual needs.