9-17-26 What the Fed Said
The discussion questions the strength of the broader economy, arguing that AI spending is masking growth closer to 0% elsewhere and that labor conditions remain weaker than the Fed's assessment suggests. Speakers criticize the rate hike and guidance for potentially worsening demand and earnings, while noting that long-term borrowing costs are already 75 to 100 basis points higher. Markets sold off below key moving averages, but record-high S&P 500 interest coverage may limit some equity downside; historical data points to an initial decline after rate hikes followed by a potential 12-month rally. Oil could fall to $70, $60, or possibly $50 if the Iran-related problem improves, potentially pushing inflation below 2% and prompting aggressive rate cuts between March and June.
Preview · 14 more points in the app
Read the Full SummaryKey Takeaways
The speakers argue that headline growth is unusually dependent on AI data-center construction, with the rest of the economy closer to 0% growth after excluding AI spending. August retail sales also benefited from Amazon Prime Day shifting into the month and back-to-school shopping, so they viewed holiday spending as a better test of underlying consumer strength than the Atlanta Fed's revised above-5% third-quarter GDP estimate.
The speakers questioned whether further rate hikes are appropriate when inflation pressure is being driven substantially by oil prices, which interest rates cannot directly control. They said tightening instead raises borrowing costs, reduces demand, and can weaken economic activity and corporate earnings, while roughly 50,000 monthly job gains and growth of 2% or less challenge the characterization of the economy as strong.
Fed tightening is already reaching households and businesses through higher credit-card, home-equity, floating-rate, mortgage, auto, and corporate borrowing costs, with long-term rates up 75 to 100 basis points and affecting the economy with a lag. The speakers also noted that the 10-year/2-year spread narrowed from 75 basis points in February to 25 basis points, potentially discouraging bank lending because banks borrow short and lend long.
The Fed's projections showed a 3.9% 2028 federal-funds rate and 2.2% core PCE inflation alongside unchanged 2.2% GDP growth, a combination the speakers viewed as inconsistent. The market sold off because investors had expected 2027 rate cuts, while the host also cautioned that the Fed's assessment of growth risk was difficult to rely on given its forecasting record.
ECONOMY
“AI look it's real economic growth the whole AI data center buildout but like you said it's got a limited shelf life and if you know if you look at…”—
“Also, you had all the back to school shopping and all that type of stuff. And my daughter contributed heavily to that as she went back to college…”—
“Of course, given the historical track record of Fed predictions, you may want to take that with a little grain of salt, but you know, high oil prices obviously starting…”—
MARKETS
“But yesterday with the announcement of the Fed rate hike and we'll talk about the reason why the market did sell off into the close and we actually closed below…”—
“But earnings are still good and interest coverage, this is really important, interest coverage on S&P 500 stocks is at the highest level, right at the highest level on record…”—
FORECASTS
“What statistics suggest is that when the Fed starts hiking rates over the next three months, the market tends to be about 4% lower on average…”—
INTRO
The hosts introduce the program and preview discussion of the Federal Reserve’s rate hike, market reaction, economic growth, inflation, and historical post-hike performance.
Retail Sales Better than Expected
Retail sales exceeded expectations, helped by Amazon Prime Day timing, back-to-school purchases, and gasoline spending, while upcoming holidays will test underlying consumer strength.
Market Reaction to Rate Hike, Dot Plots, & Commentary
The S&P 500 sold off after the hike and hawkish projections, with another increase possible; historical averages suggest an initial decline before a potential twelve-month rally.
Room for a Rally? Odds vs History
The hosts compare a projected market decline with historical outcomes, emphasizing support levels, risk management, oversold conditions, and unusually strong S&P 500 interest coverage.
Mrs. Roberts' Hamburger Date
A lighthearted McDonald’s story about the host’s wife’s inexpensive hamburger date provides comic relief before the discussion returns to monetary policy.
Fed Hikes Rates: Policy Mistake?
The guest argues the Fed should not have raised rates because inflation reflects oil and geopolitical pressures, while policymakers appear focused on reassuring the bond market.
No Rate Cuts Next Year?
The speakers criticize projections implying another hike and no near-term cuts, noting contradictions between aggressive inflation rhetoric, weak labor conditions, and modest economic growth.
Why Would the Fed Raise Rates? (Looking at PCE)
They explain that rate hikes primarily reduce borrowing and demand, eventually slowing economic activity and inflation while creating job, wage, and household-cost pressures.
It's All About the Bond Market
The discussion examines PCE projections and argues that the Fed’s forecasts require slower growth, with rate hikes unable to directly address oil-driven inflation.
Kevin Warsh' non-Forward Guidance & Dot Plots
The hosts contend this unusual rate hike is chiefly intended to support the bond market and credibility rather than respond to strong growth or conventional inflation dynamics.
What Problems Will Rate Hike Cause?
They question Kevin Warsh’s rejection of forward guidance while the Fed continues publishing dot plots that effectively signal future interest-rate expectations.
This is screwy
The speakers warn that the Fed’s internally inconsistent communication and focus on bond yields or deficit costs could represent a significant policy error.
The Neutral Rate is Already Restrictive
They discuss how additional hikes could worsen economic conditions, forcing rapid rate cuts or renewed quantitative easing if oil prices fall or a broader shock emerges.
Has the Bond Market Already Done the Fed's Job? (article)
The guest notes that long-term yields, mortgages, corporate borrowing, and other rates are already 75 to 100 basis points higher, magnifying the impact of Fed tightening.
When the Fed Fights Inflation, it Makes Your Life Worse
The hosts argue that the Fed’s GDP outlook overlooks temporary AI-related capital spending, which masks broader economic growth closer to zero and may soon reverse.
Is This a Start of a New Rate Cycle, or Continuation of Past Rates?
The guest explains that Treasury-market tightening has already done substantial work, with long-term effects lagging while floating-rate debt and bank lending conditions react more quickly.
This is an Oil Problem
They emphasize that fighting inflation through weaker demand suppresses wages and employment, worsening the K-shaped economy despite fulfilling the Fed’s price-stability objective.
Fed Funds Rate History (chart)
The speakers compare the current policy shift with the late 1990s, suggesting one more hike may occur before longer-term weakness prompts aggressive cuts between March and June.
Give it a few days...
They conclude that oil is the central inflation variable; an improvement in the Iran-related situation could push prices toward $70, $60, or $50 and inflation below 2%.
Related Episodes
Important Disclaimers
Not Investment Advice: For education only — not financial, tax or legal advice.
AI-Generated: Made by AI from source transcripts and may contain errors.
No Guarantees: Past performance does not predict future results; investing carries risk.
Our Commentary · Request Removal