The Fed ADMITS Inflation Is Too Hot

Inflation. Hey, I keep talking about it because, hey, it keeps rising. The most recent data we have shows a whopping six point two percent annual inflation rate in the US. And, uh, this has really been brought on by two key factors, I suppose. Number one is obviously the increased demand and the reduced supply of many goods around the world. And then number two is, of course, the Fed's monetary policy.

But for the longest time, all we've heard from the Federal Reserve, particularly Jerome Powell, is that this inflation is, you know, nothing to worry about because it's mostly transitory. How many flipping times have we heard that? But interestingly, that seems to have now changed because what's crazy right now is that Powell stepped up last week and said, you know what? Inflation is actually a pretty significant threat right now. We might actually need to do something about it. And, of course, we all knew this, but it's crazy that in a week he's pretty much done a complete 180, which immediately had a downward impact on the stock market and could lead to even more downward pressure in the not too distant future.

So in this video, let's dive into exactly what was said, including a pretty funny statement that we'll talk about towards the end of the video. So, with that said, let's get started. [Music] So, Mr. Powell, now you're actually admitting that inflation is a threat and you might need to do something about it. I actually find this kind of funny because it seems as though this kind of change of tune has happened right after Joe Biden nominated Powell for his second term. It's kind of amusing because, you know, obviously Joe Biden wouldn't want interest rates to rise or the Fed's purchase of government bonds to suddenly stop. Obviously, he has huge plans to send the US deeper into debt to pay for his various "Build Back Better" kind of plans.

So it kind of makes you think, was there a little bit of job protection happening? And now that Powell's got the nod, maybe he's actually free to tell us the painful truth. There's a bit of a conspiracy for you. But anyway, getting into the actual story, Jerome Powell spoke during a Senate hearing last Tuesday, and in it, he actually said some very interesting things. The main takeaway that everyone is talking about is that Jerome Powell said it would be appropriate for the Fed to consider accelerating the reduction of its asset purchase stimulus program at its meeting on December 14-15.

For those that don't know, the Fed is currently buying 80 billion dollars worth of government bonds per month and 40 billion in mortgage-backed securities to inject cash into the financial system. This is what's referred to as stimulus. But now the Fed is winding back those purchases. It was going to be at a rate of 15 billion dollars less each month, but now they're considering wrapping it up faster. Powell said, quote, "The economy is very strong and inflationary pressures are high, and it is therefore appropriate, in my view, to consider wrapping up the taper of our asset purchases perhaps a few months sooner."

This is significant for two main reasons. Firstly, because it shows Jerome Powell is acknowledging that inflation is a problem that needs dealing with. And secondly, it also shows that the Fed is feeling pressure to get on top of this inflation sooner. So, on that first point, Powell admitted the risk of higher inflation has increased, and that to get back to the kind of labor market we had before the pandemic, we're going to need price stability. What the heck is this? Legit? He also said, in a sense, the risk of persistent high inflation is also a major risk to getting back to such a labor market.

My gosh, is this even real? I never thought I'd hear it. Jerome Powell actually admitting that inflation poses a risk and it needs to be dealt with. And get this, he even admitted that the Fed got it wrong, kind of. He said, "What we missed about inflation was we didn't predict the supply side problems. Those are highly unusual and very difficult, very non-linear. It's very hard to predict those things." So that's the first significant bit of news: the Fed actually admitting that inflation is a genuine risk and something needs to be done. But as I said, we already knew that. I mean, even though the Fed hasn't been saying it, we've all been saying it for months.

But then the second, more significant takeaway is that the Fed is saying it's probably appropriate to get the stimulus wrapped up sooner than planned. Why would they say that? This tells us that they aren't happy with where inflation is right now and that they need to get ready to do something about it. I think this article actually hits the nail on the head here. It says, if officials were to quicken the pace at which they reduced the purchases by 30 billion a month after the December meeting, they could conclude the program by March, giving them more flexibility to raise rates in the first half of next year.

And I think that's exactly what the Fed's intentions are as well. Because they're playing this game at the moment, right? They don't want to freak anyone out. They don't want to do anything big suddenly because the markets will just tank real hard, send everybody into chaos. So they have to try and do these things gradually. And, of course, the way to stop inflation is to raise rates. So, aka, take money out of the financial system. But right now, they're still injecting cash into the system. So they need to stop the stimulus first before they can then go the other way.

So I think they now realize, with inflation really heating up, that they need to get this stimulus wrapped up asap so they can then start raising rates potentially in the first half of next year if inflation continues to get worse. And you might say, "What? But you know the Fed said they won't raise rates until 2023." Well, yes, but if you look at the trend, it wasn't that long ago the Fed was saying no rate hikes to 2024. Then they said late 2023, now probably 2023. The timeline continues to get shorter, and yes, that's because this chart keeps going up.

So if that line continues to go up, then I would not be surprised to see the Fed raising rates as soon as they realistically can next year. And personally, I think if inflation goes up any more than what we're seeing right now, you'll see the stimulus wrapped up in about four months, and rate hikes starting in six months. Now, of course, I don't know that, but from the trends we've seen, that seems the likely outcome in my eyes. And the reason I say that is it's a much better strategy to nip inflation in the bud rather than trying to fix it after it's run wild. It's a hard call, but America learned that lesson in the 1970s.

But, you know, as I said, I don't know that for certain, not at all. Who knows, maybe inflation cools down from here and the Fed wraps up the stimulus, and then that's it. I mean, we just don't know. Also, one thing I found pretty funny out of this hearing is that Powell said he's decided to retire the word "transitory," as apparently it had become unnecessarily confusing for people. Which, honestly, I find pretty funny because he's basically saying we aren't retiring the word because the inflation we've seen isn't transitory. No, no, no, no. We're retiring the word because clearly you guys didn't understand what we actually meant when we said it. It's like, well, what we actually meant is that inflation will rise persistently over a few months to the highest point in 30 years. Geez, how did you guys not know that's what we meant?

So I find that kind of funny. They're just completely on the defensive with that. But anyway, overall, they're the main takeaways from this latest hearing. And I just wanted to finish off the video with a bit of a cautionary note for investors, I suppose. And that note is that I think at this point, I think we should not be surprised if rates rise, you know, fairly soon. We should be aware that this is now a very real possibility for mid-next year or potentially sooner if inflation runs hotter. So just prepare yourself mentally. Don't be surprised when rates rise. Understand that it will happen. We don't know when exactly, but it will happen, and it could happen soon.

And if rates go up, asset prices, including stocks, will likely start coming down. The markets could hurt a lot. The main reason for that is that each asset market right now is extremely inflated, either directly or indirectly because of low interest rates, aka easy borrowing. So I'm not trying to get anyone scared or anything like that. I'm not trying to encourage you to sell your assets and move to cash, nothing like that. All I'm saying is just be mentally prepared for something like that to happen. Don't be one of those investors that just thinks markets will just keep going up forever. Don't be the investor that falls into confirmation bias and just brushes off the facts of the matter. If you think like that, it's only a matter of time before you get completely wiped out, and I don't want anyone to get wiped out.

So I think now is a good time to start thinking about it. So anyway, guys, that will just about do us for this video. Let me know what trend you think we'll see with inflation over, say, the next six months. Leave that down in the comments. Let me know, are you expecting rate hikes from the Fed sometime next year, or do you reckon it'll be 2023? Love to hear from you guys. I very much appreciate your opinions. Drop them down in the comments section below. Let's have a discussion about this. But apart from that, guys, that'll wrap up this video. Thanks very much for watching. If you're new around here, subscribe if you haven't seen some of my videos before. Feel free to stick around, of course. Leave a like on the video, I really appreciate it because it helps get that algorithm churning. So I appreciate it. If you're interested in how I go about my investing, there's Profitful, there's new money clips down in the description for short-form new money content. There's the Patreon. Thanks to all the Patreon patrons that have decided to sign up already. Of course, all the money we raised there just goes back into the channel.

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