The FEDS Warning | Two More Rate Hikes | The Recession Is Coming

Now, as we know, the Federal Reserve has paused their interest rate hikes, right? The Fed had done 10 straight federal funds rate increases over the last 15, 16 months or so, right? And of course, these rate hikes were based on trying to bring down inflation, trying to make sure prices get lowered. The average annual increase in those prices would not be going up so fast. The whole point was to cool down inflation, which had reached a whopping 9% just last year. So that means prices were increasing at a rate of 9% annually. Way too high. Matter of fact, that was the highest it had been in 40 years. Now since then, the Federal Reserve has sort of put the full court press on inflation, right? By utilizing the federal funds rate, the increase in the federal funds rate to cool inflation. And they pushed the federal funds rate from about 0% up to now between 5 and 5.25%, which is basically saying the Fed increased the cost of borrowing money so that less people would borrow money, causing the increase in the prices of goods and services to slow down, right? So goods and services automatically go up every year due to inflation, but they want them to go up at a slower pace. Now let's be real. What the Fed has done has actually worked. It's lowered inflation. Right now inflation, like I said, went from 9% last year to now a year, a little over a year later, inflation is right about between 4 and 4.5 to 5%, depending on which model you're looking at, right? CPI versus core PCE, but it's right around between 4 and 5% from 9%. So it's really gone down quite a bit. However, the lag time has been really long. It's taken it quite a while to get to where it is. The Federal Reserve did not expect that it would take so long based on their increases in the federal funds rate. So again, just a couple of weeks ago, the Federal Reserve came out and said, let's chill. Let's pause. Let's not raise the federal funds rate again for an 11th straight time. And they eased up the pressures just a little bit. I think it was based on a couple of things. I think number one, it was the smaller banks, not the large banks, not the top tier banks, right? But the smaller regional banks and their bank reserves, right? And then secondly, I believe it was the commercial real estate industry. Now, guys, I think there's going to be a crisis in the commercial real estate industry coming fast if it's not already here. I think we're going to see a large number of foreclosures happening in the commercial real estate space. Because in the next 18, 19 months or so, guys, there's going to be $900 billion worth of U.S. commercial property debt that's coming due. And so there's going to be many, many commercial real estate owners who are going to be forced to refinance. And they're going to be forced to refinance during a time where the rates are much higher than they were a year ago. I think most of us really don't understand how this whole work from home phenomenon that a lot of people are doing is basically destroying a lot of the commercial real estate industry, the buildings that were set to house employees. Because now a lot of those buildings are vacant. And so their vacancy rates are higher than ever. And when you have high vacancy rates, it means that those commercial real estate owners are not being paid. And if they're not being paid when they ultimately have to refinance their loans, if you think there's a lot of abandoned buildings now, you just wait. There's going to be more abandoned buildings. So I think the Federal Reserve was sort of taking that in consideration when they said, let's pause for a minute on the rate hikes. Let some things sort of catch up. Let some of the lag time sort of catch up. And let's put a little bit less pressure on the commercial real estate industry and a little bit less pressure on regional banks. So the Fed paused. But here's the issue with the pause that the Fed did. When they paused and said, we're not going to raise the federal funds rate again right now. They also at the same time came out and told us, hey, we're going to raise it at least a couple of more times this year. So this pause is just a minor blip on the radar, right? Little bitty bandaid. We're going to keep the ball rolling in just a few months. And guys, we know that when the Fed raises rates or when they talk about raising rates, it has sort of a negative effect on the stock market. The stock market typically takes a hit and goes down. And now the other issue that I want to get to on this video, guys, is that, hey, in spite of the Fed's continuing press against the inflation, the inflation still sort of remains high. Again, it's about half of what it was a little over a year ago. But it's more than half than what the Fed wants it to be. The Fed wants it to be down around the 2% mark. Well, it's still between 4 and 5%. So it's gone down over the course of a year, a little over a year, but it's still twice as high as what they want to see. And me personally, I think it'll take all of the rest of this year and perhaps all of the rest of next year to get down to the 2% inflation rate that the Fed really wants to see. And I say that because when you look at certain data, you do begin to see that consumers are starting to sort of consume a little bit less and sort of cut back on spending, whether that's because they have to cut back on spending because of the higher interest rates or whether it's because they're just choosing based on all the talk and everything that they're just choosing to sort of cut back. But you see a slight cutback in consumption, more in line with 2% inflation. But again, there's lag time, so it's going to take a while for that to sort of trickle down to inflation. And again, the lowering of consumer spending can be both good and it can be bad. It can be good in that it's really what the Fed wants to see. It wants to see consumer spending slow down because that ultimately is going to help inflation slow down and go down. But when consumers don't spend as much and you see consumer spending starting to go down, it means that we have a higher chance of a recession, which is just two straight quarters of a down GDP. That's the textbook version. It means that we're probably going to see a recession as people spend less and less money. So the Fed is going to raise interest rates at least a couple of more times this year to continue their fight against inflation and trying to get it down to where they wanted it 2%. And that's going to cause, frankly, guys, some pain for some folks, for some consumers and some pain in the stock market. Now, I think after this year, I think the Fed is going to ease back a little bit, at least the first quarter of next year, and maybe start raising rates again by second quarter of next year, depending on what's going on in the economy at the time. And I also think that the mild recession or the recession that the Fed has anticipated, which they talked about at their last meeting. This recession, I don't think it's going to happen at the end of this year. I think it's going to happen three, four months down the road beyond that into the first quarter and maybe second quarter of next year. Because all of the projections that the Fed has done is already three, four, five, six months behind, right? Remember, the lag time has not been what the Fed expected. It's been much longer. So I think that lag time is going to continue to stretch this possible recession beyond quarter four of this year and into quarter one and maybe quarter two of next year. Because everything is sort of behind, so I think the recession is going to be pushed back as well. And I think one of the big reasons for that is unemployment. Our employment, our labor market is super duper strong still. We know last month the unemployment rate went from 3.4% up to 3.7%. But guys, 3.4, 3.6, 3.7, those are 40 and 50 year lows when it comes to unemployment. That means everybody is working. Not everybody, but most people are working and most people are spending money and most people have the wherewithal, the financial ability to spend some money. And so that strong labor market is really going to make the lag time for this upcoming recession even further down the road. Now we do have to keep this in mind, guys. Student loan repayment, which is going to affect maybe 40 million people in America. Student loan repayment is going to kick in. It's supposed to kick back in in another month or two. Now when that kicks back in, people have to make tough decisions and tough choices, right? Because now they have to spend $200, $300, $500 a month that they were spending on other things now has to go towards student loans for a lot of people who've held their loans in forbearance. So that's going to be an issue and that's going to play a role in consumer spending as well in quarter three and quarter four of this year. But again, everybody is going to be impacted one way or the other over the next eight, nine, 10 months by this downturn in the U.S. economy. So you got to be ready and you got to be prepared because when the economic conditions worsen, right, we know that credit is going to tighten up. Money is going to continue to be more and more expensive to borrow and the banks are going to be more selective about who they decide to loan money to. Their standards are going to increase and continue to tighten as the cost of money gets higher and higher. So guys, hey, the economy has slowed. We know GDP has gone down the last three quarters in a row. It's still in the positive, but it could be in the negative soon. It's slowing, but it's not slowing fast enough. It's not slowing the way that the Federal Reserve thought it would slow. The rate at which prices are increasing is still too high. Now, our job is to make sure that we keep our resume updated because we just don't know what's going to happen with the labor market. It could go from great to fair to bad fairly quickly. We just don't know. So keep the resume updated. Keep your skills updated or get new skills so that you become more valuable to the market. Continue to build your cash reserves. Continue to build your emergency money. The money that you need in case somebody loses a job or you have some type of emergency, albeit medical emergency, albeit financial emergency. And the other reason you want to be building up your savings or building up your cash is for leverage. So that as banks keep tightening up their credit standards and the interest rates keep rising and they keep making it harder and harder to extend their credit to consumers, you may find yourself wanting to purchase a home or some type of real estate, right? So you want to have a larger chunk of cash to use as leverage while interest rates are higher than we like to see as a real estate investor or a homebuyer. And of course, slow down on the credit card usage. Guys, the average credit card interest rate is over 20%. So you don't want to be using credit cards, first of all. But if you have to use them, barely use them. Don't use them much at all because the interest rate is just way too high, guys. So, hey, guys, I just want to pop on here and give you this warning, right? This warning of what the Fed has said they're going to do in terms of increasing the rates more this year and trying to explain to you guys what that means to us and what we can do to prepare. Hey, if you got anything at all out of this video, do me a favor. Smash that thumbs up button for me, guys. And check out a few of these videos right here for more on the U.S. economy. Hey, the best person to take care of the old you is the young you. Do me a favor. Take care of yourself, but always take care of other people. Until the next video. Peace.