THE FED'S FINAL CHOICE: 3 Options You Need to Know About

Michael Zuber (0:02)

The Fed only has three options. We are going to review the three options in front of the Fed, because we will get our answer tomorrow. But I will propose what I believe is actually the best answer, and it will not be one of the three options that the Fed has at its disposal. I do think a fourth and shocking answer is the correct answer, which we will get to. So folks, if you don't know, the Fed meeting started today. It is a two-day affair. We will get the answers from the Fed meeting tomorrow. We will get the Fed rate decision. We will get a press conference, and we will get the dot plot. So, what could happen?

Well, if you believe President Trump and a lot of his minions, the Fed should do nothing.

So, that would be a continuation of the pause. Now, let's be clear, they want a rate cut, but that is not practical. So, the best they can hope for tomorrow is a pause. I do think if you step back and look at a pause, it will only be one step in a series of events that would have to occur. I believe if the Fed decision tomorrow is a pause, that Kevin Warsh must go out and be very hawkish. Talk about the Fed that is willing to move forward. Talk about the Fed's willingness to beat back inflation. If they do deliver a pause, then the Fed must have a very hawkish statement. The Q&A must be hawkish. The dot plot must be hawkish. So that is going to be step one. We do have some people saying that my screen is frozen. We've got 40 or so people on. Let me know in the comments if you have the screen frozen. It doesn't appear to be on my side, so it may be on your side. But let me know if this is not a good recording.

I could always restart.

All right, so they log back in, log back out, so they're good. All right, so the stream is fine. So option one, a pause, but a hawkish statement. Okay, lots of people want that.

I don't think that's coming, but hey, it is one of the options. Step two, they could give a hike.

I think the last thing I saw was a 95 percent chance of a hike. So they could deliver a hike that the market expects, but then the statement is dovish. What would a dovish statement look like? Well, a dovish statement would be like, we're getting ahead of this, we're going to let this sit awhile, we're going to let it breathe. The data is not horrible, but it's not great. We're going to be very, very patient. Also, the dot plot that comes tomorrow will also be dovish. It would likely highlight the next rate hike is in 2027 Again, the market today is expecting two rate hikes in 2026 So again, option number two, they give the market what they expect, a rate hike, but the statement, the press conference, the dot plot is dovish.

Again, I do not think that is coming, but that too is a certain possibility. All right, step three. This is the one that's right now, I think, most likely, but is not the best option. I will give you the best option, in my opinion, in step four. Step three, Kevin Warsh gets in front of the microphone. He delivers a quarter point rate increase. The dot plot is uber hawkish, talks about willingness to continue, you know, frankly puts an October rate hike on the table, right? A series of rate hikes is coming. Again, we are talking very, very hawkish. So we're going to go through these three options and talk about what likely happens to the 10-year note, which is what we care about in real estate. This will probably also impact stocks, risk assets like gold, Bitcoin, and everything else. So if we get a pause, even a pause with a hawkish wash and a hawkish dot plot, the 10-year note will raise higher. Basically, the market, the bond vigilantes will say, Kevin Warsh is an empty suit. He's Trump's little bitch, and he has no bite. He is all bark. Kevin Warsh will lose all credibility if he has any left. This would be the worst outcome for the market, for the 10-year note, as it would raise higher. What does raise higher mean? I think it could go to 5.15, 5.18, something like that. It would go noticeably higher and very, very quickly. All right, step two, they give you the market, the hike, but they're dovish. That too is not what the market wants. That too would be seen as Kevin Warsh and the Fed being too dovish in this environment. It would not be as bad because again, he went against his boss. The 10-year note would go up, but probably very little. I think right now it's 5.02, something like that. So maybe it goes to 5.06, 5.08, something below 5.1. Again, no rate hike, dovish, we're going higher. So delivers a rate hike, but dovish, not good. If he delivers a rate hike and is uber hawkish like he was at Jackson Hole, shockingly, that could bring the 10-year note down. If you want mortgage rates to go lower, you have to hope the Fed puts on their big boy pants, stands up to the president of the United States, and says, I am here to do my job. My job is full employment, check, and stable prices. We have now missed this target for 59 months, and we are not messing around. He has to be uber, uber, uber hawkish. And yes, folks, the 10-year note could go down. The 30-year bond could go down. All righty, folks, those are the three options, but I did promise you a fourth. I believe the best option for the Fed right now is to shock the market, shock, surprise the market. I believe the right answer for the Fed is to say enough is enough. Here is a 50 basis point rate increase. That would likely blow up lots of things. It would blow up the speculative AI bubble. It would blow up the debt. Frankly, Oracle would be likely in trouble because they have so much debt on their balance sheet. This willingness to fund AI forever would evaporate. It would likely send stocks lower.