BREAKING: Federal Reserve Announces Upcoming Rate Cut! (Major Changes Explained)

What's up guys, it's Graham here and without exaggeration, we're probably about to witness one of the craziest moments in history. For example, even though the Federal Reserve just announced another rate pause a few hours ago, the market believes that we could see the first rate cut as early as September. Politically, the market is bracing itself to be completely overturned and with new proposals coming out on a weekly basis, including nationwide rent control, we should break down exactly what this means, what's likely to happen, and how this is going to impact you.

Because I got to say, despite what you might think, the stock market appears to favor one political party over the other with significantly higher returns. The housing market could be thrown for a twist depending on who's in office, and the Federal Reserve is at the center of everything with some brand new comments that you're definitely going to want to hear on this episode.

Costco is now selling apocalypse-ready food buckets. Although before we go into that, as usual, if you appreciate me doing everything I possibly can to get this video out within a few hours of the Federal Reserve meeting, all I ask in return is that you hit the like button or subscribe if you haven't done that already. It's totally free, it takes you a split second, and it's a thank you for doing that.

Here's a picture of a blenny, so thanks so much! And also, a big thank you to Cook Unity for sponsoring today's video, but more on that later.

All right, so to start, in terms of an upcoming rate cut, we got to address the catalyst of everything, and that would be inflation. Now, even though consumer prices have risen on average across the board by 20.8% since 2020, there is some good news in the fact that prices are beginning to come back down or at least not go up with such quick velocity.

As proof of this, it was reported that prices in June fell for the first time since the start of the pandemic. Even though it was only a drop of 0.1%, the trend at this point is obviously clear: inflation is beginning to subside. In this case, you could see that all items increased at a rate of just 3% year-over-year, and if you remove food and energy, since those could be a bit more volatile, we're back to the same levels that we saw in early 2021.

In terms of why this occurred, a 3.8% drop in gasoline prices certainly helped, but used vehicle prices also decreased by 1.5% on the month and 10.1% from a year ago, leading to the conclusion that inflation could finally be subsiding. Higher interest rates could soon be coming to an end, and if this continues for another few months, we could be in the clear for some rather substantial rate cuts. Or will we?

Well, to break that down a little further, there's one topic that's never been more relevant than it is right now, and that would be the stock market. That's right; on the one side, we have Democrats who so far have lifted the S&P 500 with a nearly 20% gain year to date, while on the other side we have Republicans, with Trump proposing a massive corporate tax cut that could lead to another economic boom.

So, that got me thinking: who exactly is better for the stock market, Republicans or Democrats? Now, obviously, past results aren't always going to be indicative of what actually ends up happening in the future, and of course, a president doesn't have direct control over whether the stock market goes up or down.

But surprisingly, there were some trends that I found rather shocking, so you're going to want to hear this. Over the last 100 years, only three presidents have ever experienced negative annualized returns of the S&P 500 over their term. That would be George Bush, Richard Nixon, and Herbert Hoover, who happened to be in office during the Great Depression. That's it! Beyond that, every other president has seen some type of positive returns throughout their presidency.

But oddly enough, election years tend to be the most profitable. As an example of this, over the last 100 years, the stock market has averaged an annualized 10.3% return, but if you isolate presidential election years, that jumps to a staggering 11.6% return. In fact, as it stands right now, investors are actually the most cautious around midterm elections, with the market increasing just 7.4% compared to non-election years, where the market averages 14.8%.

Why, you might ask? Well, if there's anything an investor hates, it's uncertainty. And when the market can't price in the unknown, it tends to fall for the worst possible case scenario, which then lowers investor returns, especially when Congress has a much larger overall impact on the economy than the president does.

Although, in terms of which political party is better for the stock market, that really just depends on whose data you look at. For instance, one chart found that the average Democratic president achieved an 8.72% return when both the House and Senate were a majority Democrat, a 15.72% return with a split Congress, and a 14.5% return with a Republican Congress.

On the other hand, Republican presidents received, on average, an 11.7% return with a Republican Congress, 12.2% with the divided Congress, and just 1% with the Democrat Congress. So, a Democratic president with the split Congress wins, right? Case closed? Well, not so fast.

Unfortunately, the Republican president Hoover during the Great Depression significantly skewed the results to the downside since an almost 30% annualized loss is bound to drag down the average. So, if we just excuse that one data point, everything else begins to change. Like, according to the Motley Fool, since 1957, Democratic presidents have seen an average 99.8% return compared to Republicans' average 6% return.

But Republicans have a median 10.2% return compared to Democrats' 8.9% return, which some could argue is way more accurate since this includes stock compounding. And if that sounds really confusing, just think of it like this: ultimately, what it seems to favor is that historically, a divided Congress is best for the stock market since that means any radical proposals are probably unlikely to go through.

It's going to be more of the same. And if you're concerned about stock market returns, it's a lot more opportunistic to look at the House and the Senate because they have way more control than the president, and at the end of the day, that's what really matters the most.

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All right, so now back to the topic at hand: housing prices. Yes, it's no surprise that prices have hit another record high, rising 4.1% nationally from a year ago. But this time, they are rising at the slowest pace that we've seen since early 2023.

At this point, the Chief Economist went on record to say that we're seeing a slow shift from a seller's market to a buyer's market. Supply and demand dynamics are nearing a balanced market condition, implying that the days of massive price gains are probably behind us. Especially now when it's cheaper to rent than own in all 50 of the largest U.S. metros.

However, in terms of helping the cost of rising rents, one proposal has begun making the rounds, and that would be nationwide rent control. Under this new proposal, the president calls on Congress to cap rent increases on existing units at 5% or risk losing current valuable federal tax breaks and provide $110,000 in mortgage relief to unlock homeownership for millions of Americans. But is this actually enough to make a difference?

Well, in terms of rent control, the honest answer is probably not. And if anything, it can actually make the situation much worse. For instance, here's what the current housing climate looks like: half of American renters pay more than 30% of their income on housing, which just for some context is the exact same as homeowners spend on their mortgage.

And 12.1 million Americans spend more than half of their income on housing, which, yeah, is a lot of money. But practically, like I mentioned earlier, rent controls are actually found to make the entire housing situation worse.

I mean, there are very few things that economists uniformly agree on, but a 1992 poll of the American Economic Association found that 93% of its members agreed that a ceiling on rents reduces the quality and quantity of housing. In fact, a more recent Stanford study found that rent control has an adverse effect on housing prices for tenants and does the opposite of what it's intended for.

How? Well, they started by looking at two groups of housing: one built prior to 1980, which is rent-controlled, and the other is built after 1980, which is not rent-controlled. And here's what they found: rent-controlled tenants were 20% more likely to stay in their unit. Renters were more likely to move somewhere else if they didn't have the incentive of keeping their rent capped. Where they currently live in the priciest neighborhoods, turnover was the highest as landlords actively try to remove tenants to achieve market rents.

Landlords of rent-controlled buildings were more likely to convert their buildings in such a way that wasn't rent-controlled, reducing the amount of housing supply by 15%. And the loss of available housing drove up the price of rental units. The net result is that based on these studies, rent control restricts the amount of new housing supply that's able to come on the market.

And while some tenants might get a great deal and win the lease agreement lottery, most people never have access to such affordable pricing. And if they do, they are incentivized to never leave or move elsewhere or risk giving up their price. Think about it. Just like low interest rates kept homeowners from selling because they don't want to give up their historically low mortgage rate, rent-controlled tenants also don't want to leave and are locked into where they're currently staying, thereby resulting in lower supply.

On top of that, in terms of city revenue, rent controls are found to decrease income taxes as landlords make less money and therefore pay less in tax. It's also found that because of lower rents, properties had a lower value, which resulted in lower property taxes. And all of that is money that flows back into the community.

Now, even though some corporate landlords are money-sucking vampires who only exist to extract as much financial value from unsuspecting tenants as possible, it was found that across the United States, less than 50% of landlords raised rent by more than 3%, with the other half raising rent by less or even nothing. Or basically, most of these headlines that we see are simply from an existing tenant moving out, a landlord renovating a property, and then renting it at a higher price to somebody else, especially as more luxury units are being developed.

Oh, and speaking of luxury units, high-income renters have driven most of the growth in rents since 2010. And that means as high-income earners look to downsize, relocate, or move somewhere else to save some money, they are driving up the average cost by paying more. And that of course is reported in a lot of the articles that we see.

This all suggests that overall, if you're a tenant who stays in the same place, the chances of your rent increasing by more than 3% is unlikely. And if you do have a rent increase of more than 3%, having unrestricted access to more housing supply would help you negotiate a better price.

The only solution for lowering rents is to simply add more supply onto the market through tax incentives for builders to construct more units or less restricted zoning. That's it! For some reason, politicians love to complicate something that is really just as basic as simple supply and demand. And for this, if Congress makes it financially viable to build cheaper units, people will build cheaper units.

Plus, to make matters even more confusing, realistically, none of this is going to be passing through Congress. And it's purely political posturing to try to either gain votes or make the other side look bad. That's the government for you.

But in terms of what Jerome Powell just said a few hours ago on the state of the economy, here's of course what you came for. In terms of what Jerome Powell just said a few hours ago, overall, it was a lot more positive than his past meetings. Even though he didn't come out directly and say we're going to be lowering interest rates at the next meeting, he did give us some clues that give them the option to reduce interest rates if the data continues to look good and if they determine it's the right choice.

For example, the labor market is slowly beginning to soften with fewer job openings than there were before, and that could be a good reason to pivot. Inflation is on a downtrend, meaning the Federal Reserve is doing a good job keeping it under control. Obviously, they're not going to outright promise a rate cut at some point in the future, but it is looking rather optimistic, assuming all data points are in the right direction. And as of now, that's looking to be on September 18th.

All of that just means that the door is now open for a rate cut, but they're not going to know 100% until a few days before. I mean, they still want inflation to subside even more than it already has. They want to make sure the job market stays strong, which so far is pretty good. And according to the governor of India's central bank, there's always going to be the temptation to say, "Well, if we really want a soft landing, we could start cutting rates now because we've been in restrictive mode for some time."

And even after the Fed cuts, policy may remain restrictive. Or in other words, even if we get a small rate cut in September, rates are still relatively high compared to where they've previously been. So don't expect things to get magically cheaper overnight or to see any major changes in the market.

We're also going to have to pay very close attention to their September projections, which is likely to give us a lot more definitive guidance in terms of what they expect to happen. So overall, this meeting was really just more of the same. Jerome Powell reassures everybody that they're going to be data dependent, take it slow, and then make their decisions meeting by meeting.

But it does appear as though all indicators are pointing to a 25 basis point rate cut this September. And if that happens, it'll be the first time in more than two years. Although I personally believe that even if we do see a rate cut, they're going to take it extremely slow, only cut when they're 100% certain that it's the right time. And that most likely means we're going to see higher interest rates for longer than people expect.

It's not just going to be a quick race to the bottom. I just think this is probably going to be something that'll take another year and a half to two years to normalize, or at least get to a point where the Federal Reserve rate hovers somewhere around 3.1%, which is currently something that they project to happen around 2026.

That's also why if you would like to see the update on September 18th, make sure to subscribe so you don't miss out on that. And let me know what you think down below in the comment section. I'll do my best to read and respond to as many of them as I can. Thank you so much! I hope you found this helpful and until next time.