Did The Fed's Hawkish Cut Just Change Everything For Markets? | New Harbor Financial

**Adam Taggart** (0:00)
And we should be live. Welcome to Thoughtful Money. I'm Thoughtful Money founder and your host, Adam Taggart. I am welcoming you here to a special bonus video we're doing here at the end of the year. I'm joined by the lead partners from New Harbor Financial, one of the endorsed financial advisory firms by Thoughtful Money. You see these guys on the channel with me every week. Joined as usual by John Lodra and Mike Preston. Gentlemen, how are you doing?

**John Lodra** (0:25)
Hey, good morning, Adam. Great to be with you. Thanks for having us.

**Mike Preston** (0:28)
Hi, Adam. Great to be here and look forward to it.

**Adam Taggart** (0:32)
All right. Thanks. Well, folks, look, we thought we would squeeze in this bonus video right before the end of the year, in large part because so many questions have been sent by all you viewers over the past couple of days after last week's curveball that the Federal Reserve sent the markets. Basically by stating that it's going to be slowing the pace of future rate cuts. They're going to be more uncertain. And we're going to talk about this with John and Mike. But that certainly was not what the markets wanted to hear. They sold off hard on the news. Recovered a bit on Friday. Here, it started the week Monday, the last trading day, or I guess there's a little bit of trading tomorrow, but one of the last trading days before Christmas. Markets opened red, at least. And so a number of you have been asking, hey, is this just a bump in the road, or is this something much more substantial? And some questions around that, I'm going to pose to John and Mike here. There are also some other things that have gone on recently, too, that may not have everybody's full attention, but could be equally as meaningful. We'll talk about the yield curve that just un-inverted. We'll talk about potentially what some of the partisan gamesmanship that just went on in Washington, DC., some impact that that could have going forward. And then we will get to take whatever questions are most burning to those of you watching. We'll take live user Q&A. So why don't we just start this off, John and Mike. Again, thanks for joining me here, kind of impromptu for this, but because we're at the end of the year and people have so many questions, I just thought, let's take the opportunity and strike while the iron is hot here. Let's tackle this first question about the Fed's hawkish cut.
I've heard it argued on both sides. I just had Ed Yardenny on the program, who's sort of a well-noted bull. He doesn't really think that it's all that much to worry about. Other people are saying, look, the market is a discounting mechanism. And when you do a discounted cash flow out, when you're valuing a company, you have something called a discount rate that you discount those future cash flow streams based off of. And if that discount rate going out forward is going to be higher than the market expected, mathematically, that should reduce what today's present value of those financial instruments are. So I guess to you guys, is this sort of a seminal repricing moment for the markets, or is this just general heartburn that the market will digest and then continue on its bullish ways from here? John, why don't we start with you?

**John Lodra** (3:22)
Yeah, so Adam, the answer is it should matter, right? It should matter if the markets behave like they're supposed to, in theory. You're exactly right. Change in a material forecast of interest rates and a discount rate should affect the present value. Now, we know from Hard Knock's experience and watching the circus of markets every day that sometimes what should happen and what does happen are two different things. But let's just quickly talk about what happened. So the Fed came out. So first of all, they started their rate cutting campaign in September of this year, just three months ago, right? And it was probably the most anticipated Fed meeting of all time at the time. Every Fed meeting now is the most important Fed meeting of all time. But their first lobby into the rate reduction campaign was in September. They dropped a half a percentage point. This is after 14 months of staying at a rate of five and a quarter to five and a half. So this is a big deal. They telegraphed at the time that they anticipated they were going to be reducing rates by a total of one percentage point by the end of 2024 And in fact, now that they've concluded their meetings for the year, that's exactly what's happened. They've dropped their target rate from five and a quarter to five and a half range to four and a quarter to four and a half with this latest quarter point cut. Now, next year is where the difference lies. Back in September, they telegraphed that they thought they were going to be dropping another full percentage point in 2025 That was their prediction. Here we are as of last week's Fed meeting, and they telegraphed only two cuts, so a higher terminal rate. But what has happened? First of all, the Fed's consistency has been all over the chart. They have not been consistent at all. In fact, they say they're data dependent, but they've relied so much on their mouthpiece, their so-called forward guidance, that they box themselves into several corners, and they have had to constantly kind of change their tune. And that's what last week was. It was a changing of the tune because they have some concerns about inflation. We can get into all this with some charts and stuff like that. But the market has taken the bit and said, you know what, we think you're going to even be more hawkish than you've communicated. Right now, the CME futures on federal funds rate futures is pricing on just one cut for next year. So in a span of three months, the market has went from assuming a terminal 2025 rate of 3% to now it's assuming a most likely scenario of a terminal rate in 2025 of 4%.