Everyone’s laser-focused on this week’s Fed meeting — and the likelihood we’ll see a rate hike coming out of it.
But the real Moneyball play here isn’t about rate hikes at all…
Because the same economic forces that are driving the Fed to hike rates today will ultimately force them to cut rates early next year.
When that happens, millions of investors, fund managers and pros will find themselves bushwacked … while a small handful of traders make an absolute fortune.
Here’s how to put yourself on the right side of that trade…
Video Transcript:
Welcome to Moneyball Economics. I’m your host, Andrew Zatlin.
So everyone’s talking interest rate hikes. Meanwhile, we want to start planning for the interest rate cuts that are already working their way through the system.
That’s right. In about six months, about March timeframe, you can expect the Federal Reserve to reverse course and you want to be ready for that. They’re going to be cutting interest rates for the same reason why they’re raising interest rates, because that’s what the economic data is telling them to do.
Right now, the labor market and inflation signals are saying that it’s time to raise interest rates. Guess what? In a couple months, they’re going to signal the exact opposite, and then we got to wait for the Fed to catch up. Let me explain why I say this, by starting with what the signals are.
So let’s start with inflation…
The Fed has a target for inflation. It’s two to two and a half percent if we’re talking CPI. The reason they want to keep inflation down as much as possible is because there’s an economic growth cycle and they want to keep it lasting as long as possible. Inflation when it’s high has a way of shortening that life cycle. And so they want to keep inflation down into a reasonable zone.
To do that, you raise interest rates. You then make the cost of doing business higher, and that tends to bring down business activity and cool a lot of the inflation. But there’s a downstream consequence. The Fed has to do a balancing act.
When they cool down the economy to extend it, they also recognize that, well, slower business activity will hit things like jobs. You might not get as many jobs or you might get layoffs. And so they’re also looking on their checklist of things to look at, at what’s going on in the labor market.
So they’re looking at things like jobless claims, unemployment, jobs added through payrolls. And right now, all of those signals are very positive. For example, jobless claims have been holding at about 200,000 for the longest time this year. That’s really low. Same thing with unemployment.
Unemployment has been coming down all year long. It fell to 4.1% and has been holding at that level. In the meanwhile, payrolls, we just had 167,000 jobs added. In other words, the labor market is saying we’re really strong. We do recognize that if you raise interest rates and slow things down, the job market might soften a little bit, but we’re talking about a seriously strong market. We can absorb that softness.
And so the Federal Reserve going down their checklist sees nothing but green lights flashing, raise interest rates. However, every one of those signals is already set to reverse. Let’s start with inflation.
The reason why we have inflation at 3.4%, the reason why inflation all year long has moved up and has stayed up is partly because of tariffs and partly because of an oil shock. Let’s talk tariffs. Remember last year Trump came in, throughout tariffs, the price of everything imported went up.
Well, guess what? They’re already decelerating because we’ve hit the first anniversary of those tariffs. And that means from a year over year perspective, the price of stuff today compared to the price of stuff yesterday is now pretty much the same. Appliance prices have gone up. If you want to buy a stove, it’s a lot more expensive today than it was two years ago, but it’s not that big of a jump today versus same time last year.
In other words, when you look at all these components that we’re importing, cars, clothing, everything where we’ve seen a lot of contribution to inflation, they’re already signaling that by the time we get to December, we’re past peak and we’re going to see a lot of deceleration in the inflation.
That’s just the way the math works. We’ve already lapped the tariffs. Meanwhile, let’s talk about oil shock. Oil has contributed in so many different ways to inflation. A lot of people want to strip out, say they’ll take a look at consumer inflation, they’ll strip out food and energy prices because they’re volatile. Okay, whatever.
The reality is oil prices have a way of finding their way into the rest of the core elements of inflation. For example, airline prices. Airline prices are up 16 to 20% because of higher fuel costs. That’s driving up the inflation from say about 3.3% to 3.4%.
By the time we get to March, again, same thing as with the tariffs, we’re going to have lapped the big jump. By the time we get to March, oil prices will basically be flat to last year or even lower. In essence, by the time we get to March, regardless of what the Fed does, inflation’s going to be at their target level.
In fact, starting in December, we’re already going to start to see a steady deceleration from 3.4 to 3.3 to 3.2 and so on. Meanwhile, the labor market, well, there are a lot of reasons to expect the labor market to soften, and again, has nothing to do with interest rates. The primary reason, for example, why we’ve got low unemployment and low jobless claims has nothing to do with economic activity and everything to do with the fact of a shortage issue. We deported four million people.
We kicked out millions of workers that shrank the pool of workers out there. On the one hand, that made employers less inclined to fire people because they have a retention need, but it’s just again, basic human behavior. Of the millions of people that we kicked out of the country, a good chunk of them were filing for unemployment and they’re not here to file for that unemployment.
As a result, the number of workers filing for jobless claims or saying I’m unemployed just shrank. It’s not going to shrink any further. If anything, it’s going to start to move up because a lot of those workers were seasonal workers who were working in jobs that are going to see layoffs starting in October, specifically farm jobs and construction jobs.
See, they peaked demand a few months ago and those sectors, farm and construction, are heavily concentrated with undocumented immigrants, the ones that are here as well as the ones that we deported. So we’ve had some interesting situations over the past six months where we had strong demand shortage of supply.
Well, guess what? The seasons are over. By November, farm season’s over, planting season’s done, construction season’s done, and employers are going to lay off the normal number of employees that they lay off. That’s going to restore jobless claims and unemployment up to more normal levels.
So we’re going to see, regardless of what the Fed does, not just inflation going down, but we’re going to see the labor market starting to soften as well. Well, guess what? It doesn’t matter. The Fed’s going to take credit for it because you’re going to start to see in the December, January timeframe, this slowdown around the edges.
Warsh is the new Fed chairman. He’s trying to establish himself as the guy in charge and nothing says you’re in charge like raising interest rates. So even if the economic data is providing him with the political umbrella to make a move like this, he wants to raise interest rates.
He really does just to assert himself. Now, once he’s done that and we see the economy slowing down, he’s going to be just as eager to reverse course, especially if the economic data starts to signal that. Fed is always late to the party.
So as this data starts to show signs of a softening economy by January, all of a sudden back on the table, everyone’s going to be talking about should we be having a rate cut? And that’s where you want to start taking action.
You want to be prepared to go long and strong in the January, February timeframe as chatter starts to increase about rate cuts because rate cuts, that turbocharges the markets. Let’s see how this plays out. We will know in December.
In the meantime, we’re in it to win it.
Zatlin out.
Andrew Zatlin
Editor, Moneyball Economics