WHAT BREAKS FIRST? The Fed's New Rate Hike Strategy

Michael Zuber (0:01)

Well, as expected, the Fed raised rates yesterday. We have lots of details to talk about. We need to think about, is this the start of a rate hiking cycle? We have some economic data, and we need to start asking ourselves, what if anything breaks going forward? But before we get into all of this, you probably knew this was coming. I am going to take my victory lap. I had been calling for a September rate increase for quite a while. In fact, so far back that at the time, I was the only person on the island. Obviously, as it got to yesterday, it was over a 90% chance. But the fact that it was 12-0 was quite interesting as well. That said, I have been keeping track of the folks who called me an idiot, who said I didn't know what I was talking about. In fact, there are some friends of the channel who got inside my comments and let me know that I was an idiot, and I should stick to real estate, and that economics is not my thing. Yes, Tom, I am talking about you. I saw those comments, and, yeah, I was right, you were wrong. Maybe I do know what I'm talking about. So again, it does feel good in the face of so much hate, disrespect, probably disrespect is a better word, and told you, I told you this was coming. So next time, maybe not be so disrespectful, and we can keep things rolling. So what are the things that I noted yesterday? First and foremost, that 12-0 vote meaning unanimous is interesting.

Lots of folks probably expected Kevin Warsh to dissent. He did not. Not a single voting member of the Fed dissented.

Folks, that is a signal. That is not noise.

Next, Kevin Warsh said in front of the podium, this is a dose. What was his exact words? This is a dose of removing accommodation, a dose. Why is a dose an interesting word? And you have to know words matter with the Fed.

When I hear the word dose, it means more is coming.

Again, I'm on record telling you that I think they should have just done 50, ripped the bandaid off and see what broke. But that's not what they chose to do. They chose to give us a dose. In fact, if you step back and now look at the dot plot, the dot plot is scary, interesting, depending on which side of the table you're on, perhaps. But 16, 1, 6, of the 18 dots, again, Kevin Warsh did not give his, so there wasn't a 19th. 16 of the 18 fed presidents said there's at least one more rate hike in 2026

16 of 18 fed presidents said there is one more dose, aka fed increase, coming this year.

Four, four of the 18 said there were two hikes coming this year. Folks, there is only two meetings left, October and December. So this is interesting. Again, Warsh said a lot and not a lot at the same time, if you know what I'm talking about. But this was the line that I had to go back to a couple of times. And I have to tell you, I don't get it. I'm not sure what he's trying to say, and I'm not sure how this feedback loop works. So after I read it, if you have any ideas, thoughts, projections, interpretations, let me know in the comments below. Because this one, I'm going to be thinking about this one probably all weekend, because I need to understand how the dominoes fall to accomplish this goal. So again, one of the Q&A sessions, I forget which news reporter, it might have been Steve Leesman. I don't remember which one, but he basically said this.

Those with the least have the most to benefit from Fed policy.

When I heard that, I thought I heard it wrong.

I frankly don't get it. Because what he is saying, or at least my interpretation of what he is saying is, those with the least. Okay, so what does that mean? Let's break this down. If we think about the K-shaped economy, if we think about asset owners and not asset owners, he is talking to the bottom end of the K, and he is talking to not asset owners. Okay, I think that's fair, right? Those with the least, I would say no assets and bottom end of the K. I think that's reasonable interpretation. But then he says, have the most to benefit from Fed policy.

How does higher Fed rates, higher mortgage rates, higher credit cards, higher, I don't know, student loans, higher, higher, higher, how does that help the bottom end of the K?