The Fed Confirms THREE Interest Rate Rises Are Coming.

Hello, my name's Brandon. I'm here to talk about inflation. Honestly, I've made a lot of videos about inflation. I'm sorry to keep harping on about it; I know it's not the most interesting of topics in the world, but it is pretty important to keep on top of and kind of understand what's being done about it because that does have some implications for us as investors.

So, we have big inflation numbers to talk about. We also have a significant update from the Fed about tapering this stimulus quick smart and also hiking rates next year, aka pumping the brakes on the economy. So, we're going to talk about what's going on, and we're also going to finish the video by having a chat about how we as investors need to handle this information because it's actually very important. So with that said, let's get started.

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So we've seen inflation rising a lot this year. It doesn't take a genius to see that there's been a lot of, you know, money printing and disruptions to supply chains in many industries, and that's causing the prices of particularly goods to rise. Now, last month's data for October showed inflation came in at 6.2 percent for the last 12 months in the United States, and a few days ago we got more inflation data showing we're now up to 6.8 percent.

It's the highest inflation rate since 1982 without considering the differences in how inflation is recorded these days versus back then. And in fact, an interesting point that Hamish brought up on our podcast the other day is that, you know, if you were using the same methodology that they were using back then, our inflation rate today would actually be over 15, which is pretty ridiculous.

So that's the first bit of news: that inflation continues to rise. But the much more newsworthy story is what the Federal Reserve has decided to do about it. So I made a video a week or two ago about the Fed doing their little 180 on the current state of inflation, and in that video we discussed how, you know, Jerome Powell has said that the Federal Open Market Committee will likely discuss, you know, speeding up their taper of stimulus in response to the sustained inflation.

Now fast forward a couple of weeks, and we've actually got that exact answer. So the FOMC held their December meeting, and we've got three big things to talk about. Number one is that the Federal Reserve has resigned to the fact that inflation is heating up. They raised their 2021 inflation expectations to 5.3 from 4.2 percent, which is a bit strange because not a week ago, we got the news that from November to November inflation is up 6.8.

So, not sure how they see it coming back down to 5.3 percent, but I guess 5.3 percent sounds a little bit better than 7. So, you know, maybe there's that. And then flowing on from that point, number two, we also have confirmation that the Fed will indeed speed up the tapering of its stimulus, the first step towards tightening monetary policy.

CNBC notes, quote: "The Fed will be buying 60 billion of bonds each month starting in January, half the level prior to the November taper, and 30 billion less than it had been buying in December." The Fed was tapering by 15 billion a month in November, double that in December, then we'll accelerate the reduction further come 2022.

So what this is saying is that the Fed was providing 120 billion in stimulus per month. It's now scaled back to 60 billion in January, and they'll reduce that amount by 30 billion each month, meaning stimulus will be wrapped up by March. So, exactly what the Fed said they would likely do, they actually decided to do. Stimulus will be wrapped up pretty soon, and this is important because that then opens the door to rate hikes, which is essentially taking money out of the system, putting the brakes on the economy.

So they have to stop putting money into the system before they can start going the other way, and they're doing that. It's now that we get to news story number three, the one that's making the big headlines: the Fed is going the other way. At this moment in time, their intention is to raise rates next year, but it's not as scary as it sounds. In fact, it's actually pretty weak.

They're planning on raising rates three times, each raise being a quarter of a percentage point. The Wall Street Journal writes, quote: "The Federal Reserve set the stage for a series of interest rate increases beginning next spring, completing a major policy pivot that showed much greater concern about the potential for inflation to stay high." Most central bank officials in the projections released Wednesday at the conclusion of their two-day meeting penciled in at least three quarter percentage point rate increases next year.

Interestingly, in September, around half of those officials thought the rate increases wouldn't be warranted until 2023. So there you go—three rate hikes penciled in, each a 0.25 rise. But here's the thing: is that actually going to do anything? Is an interest rate of 0.75 or one percent actually going to reduce inflation? I mean, at the end of the 1970s, inflation ran up to like 15. When that happened, Paul Volcker upped interest rates to a peak of 20 in June of 1981. Twenty!

Now, of course, this wasn't super popular; you're essentially buying a house with a credit card interest rate, but it did stop inflation. It pulled it back down to 2.5 percent. Now these numbers are a little bit bigger than what we're seeing right now, but it does make you think: will a 0.75 rise in rates next year actually do anything? I guess we'll see, but my inkling is probably not.

But anyway, that's the news. Yes, monetary policy is shifting, the tape will speed up, and rate hikes are now all but confirmed for next year. But with that said, I wanted to finish the video by just talking about what we as long-term value investors should be doing because of this. And to get straight to the point, I think the answer is nothing.

I think as value investors, it's yes, it's important to stay in the loop with macroeconomic events and trends, but I do not think you should use them to alter your decision making. At the end of the day, we need to stay hyper-focused on those individual businesses and not get caught up in the external stuff. And there's a few reasons for this. Number one: macroeconomic predictions don't always work out.

You know, they're number two, you as an investor, you have no control over what will happen in the macro, so why are you worrying about it? And then three, if you're influenced by the macro, it may lead you to do counter-intuitive things with your individual positions. I was actually watching a Monash Proprietor lecture recently, and I think he beautifully sums up how we should be thinking about the macro when it comes to our own investing.

So, have a listen: "I think investing is difficult enough if you're just trying to understand a business and how it works. I think when you start overlaying and trying to make assumptions, okay, here's what I think will happen to interest rates, or unemployment, or recession in this year or that year, all of those things—most people are wrong about everything.

I thought that would happen with COVID in March 2020; it turned out to be wrong. I mean, I would have never guessed that now we'd be sitting at all-time highs on the stock market after, you know, more than half a million people died in the U.S. and we had all these lockdowns and stores and everything shut down and businesses, people working remote. I also wouldn't have thought that remote work would have led to a more productive workforce, not a less productive workforce.

It's all counterintuitive, and so I think that the best thing to do is not to give too much weight and not to think too much about the macro because it's a lot harder and it may not have an effect in the end at all."

In short, most macro predictions are wrong. Don't listen to them; don't worry about them. Judge each business on its merits, and at the end of the day, if you're in a company where they've got a big moat, great management, and you've bought at a margin of safety price, that's three layers of long-term protection from the macroeconomic environment.

What would be the worst outcome? It's selling a great business due to macroeconomic fears only for that business to continue growing, as you once predicted it would, and the stock price goes along with it, and you just get left behind. That would absolutely suck.

But overall, guys, that is the latest update on the macroeconomic environment and also how it affects us as value investors. Yes, rate hikes are coming, stimulus is stopping, the market may even face a big correction next year—who knows? But for us, with our long-term mindset and our eyes on great businesses, it really won't change anything.

If anything, it might just give us opportunities to buy, which at the end of the day sounds pretty good to me. So anyway, guys, that will do us for this video. I hope you enjoyed it. Leave a like on the video if you did enjoy it or if you found it useful. Subscribe to the channel if you have not done so already.

Um, yeah, let me know what your thoughts are on the macroeconomic environment and all this stuff coming out from the Fed. What do you reckon? Do you reckon that we'll keep seeing inflation? Do you reckon 0.75 is just not enough of a hike and we'll just see it continue to race up? Will they have to increase rates by even more next year?

I don't know. Let me know your opinion down in the comments section below. Um, thanks always to the Patreon producers for helping make this content possible. If you're interested in checking out Profitful as well, links down in the description below if you wanted to learn about how I go about my investing.

But guys, that will just about do me. Thanks very much for watching. I'll see you guys in the next video. Thanks again to Sharesight for sponsoring this video.

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