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the Central Bank in the US may have just popped the everything bubble 2024 has been an exceptional year for investment assets prices for cryptocurrencies AI stocks Quantum Computing stocks homes and almost everything have increased substantially one factor fueling enthusiasm for those risky assets was the expectation that inflation had been tamed and the central bank will proceed to cut interest rates multiple times in 2024 in 2025 and in 2026 chairman Jerome Powell and the committee that sets monetary policy just changed those expectations dramatically the decrease in some asset prices was almost instant following the central bank's announcement some of the froest parts of the market like cryptocurrencies and stocks with expensive valuations like Tesla took immediate hits I'm going to share with you the details of what Central Bank just did that's causing the stock market to crash like yourself I want to thank theat et's start with the statement the Federal Reserve issued on December 18th 2024 the committee judges that the risks to achieving its employment and inflation goals are roughly inbalance the economic Outlook is uncertain and the committee is attentive to the risks to both sides of the Dual mandate so let me zoom out a little bit and explain what they mean by their dual mandate so the Federal Reserve their job is to keep unemployment low and keep inflation low and what they mean by low for inflation is roughly 2% and what they mean low for unemployment is somewhere in the range of 3 and 1 half to 5% the exact target for the unemployment rate is still not known for certain but somewhere in that range so they're balancing those two goals and it is a balancing act because if the central bank takes policy that helps grow the economy that's going to bring down inflation I'm sorry that's going to bring down unemployment but that's going to increase inflation when the economy is growing and overheating it increases inflation and so there's two sides of that if the Central Bank wants to control inflation the policies that it takes brings down economic activity and slows economic growth and increases job loss and increases unemployment but the FED has to balance that right because as an individual it's not good for you to have outof control inflation in fact it might be the one thing that's the worst thing that can happen to an economy is out of control inflation that might be worse than increasing unemployment because the whole financial system will be at risk if inflation gets out of control and so the central bank has to balance those actions and up until today what the central bank had been seeing in 2024 is a persistently decreasing inflation and so they were able to shift their focus on the unemployment side of the equation because inflation was incre was decreasing they felt that they were confident in decreasing inflation and so they were lowering interest rates in fact they lowered interest rates at this meeting but what was more important than the decrease in interest rate in this meeting was the forecast for future decreases and they reduced the forecast for future decreases and they also told the market that they expect inflation will be much higher than they previously thought and that goes along the lines of what I had been reporting if you watched my inflation video a couple of weeks ago I highlighted that this is precisely what the Federal Reserve was going to do I told you all that a couple of weeks ago that inflation had been increasing and to make matters worse asset prices were getting in Bubblicious territory things like cryptocurrencies and some stocks like Tesla were getting extremely overvalued and so all of that enthusiasm fuels inflation because the people that are making money on those Investments are then going out and spending that money and that's overheating the economy and that's on top of the already accelerating inflation and so that's precisely what the Federal Reserve did here they cut interest rates by a quarter point but they signaled that they're not going to cut interest rates by as much as was previously expected next year and the year after that let me share with you those details so here's the policy projections from the Federal Reserve board members as of September 18th 2024 and at this date they were forecasting that inflation core PC in pce inflation would be 2.6% in 2024 2.
2% in 2025 and 2% in 2026 that means that it's going towards its Target of 2% right that's the target for the Federal Reserve is to keep inflation at or very close to 2% they don't want zero because 0% inflation is also bad news for the economy I won't get into why that's the case that's a whole another video I will need to make but the Central Bank needs roughly 2% inflation so in September they had forecasted 2.6 2.2 and two for the next 3 years in today's release they updated that number from 2.6 to 2.8 and then 2.5 and 2.2 and they don't have the inflation rate coming down to 2% until 2027 so a big increase in inflation expectations just from September to December and part of that increase is undoubtedly the enthusiasm surrounding the elections in the United States which fueled asset price increases which fueled increasing spending from consumers and that led to Rising inflation in just these last couple of months inflation has accelerated and I shared with you I'll link that video at the end of this one of what I thought of the most recent inflation report all right so here I have the September numbers for what's called The Dot Plot this is what the Central Bank committee members pick out as their expected interest rate policy for the respective years and so you can see 2024 2025 and all of these dots are individual committee members voting on where they think interest rate should be at those respective times okay so take a look at here the these are the expectations for 2024 where they expect interest rate policy to be and this is where they expected interest rate policy to be for 2025 and this was in the September meeting look at all these dots at around 3% and 3 and a half% look at all those dots around this point here okay I want you to keep this in mind because I'm going to switch to the latest figures from December and see how these have changed all right so now look at the updated numbers from the December policy meeting look at how all of those people who thought the committee members who thought 3% or 3 and a half% would be appropriate next year those have all but vanished only one Committee Member actually thinks interest rate should be at 3% or 3 and a half% next year the majority of committee members now think that 3.75 or 4% is the more appropriate interest rate for next year let me switch back here the majority of committee members previously thought 3% or 3 and a qu% now the majority of committee members think 3.75 or 4% is the more appropriate number so an increase of about 50 basis points of interest rates in 2025 expected interest rates now this is their Dot Plot meaning that when they go to vote this is what they're going to vote for and the chairman of the central bank takes these into consideration the Chairman's vote is also included here so that means that interest rates are likely to be about 50 basis points higher next year than initially expected and the same can be said for 2026 if you look at the dotplot for 2026 this is the updated number where the majority of committee members are expect something in the range of about 3 and 1 12% and you can look at the previous numbers where committee members the majority of committee members were expecting something in the range of 2.75% as the majority of the committee members were voting on so big increases in interest rates expected and a 50 basis point increase for interest rates is a big move it's a huge huge move interest rates don't move by all that much all that frequently so a move of this magnitude has large implications and you've already seen that almost instantaneously in some of the what I feel in my opinion were the most overvalued Assets in the market and that is Bitcoin and Tesla stock just as a proxy I use them as investor enthusiasm and excitement for asset prices you you can see Tesla stock is down over 8% today following that announcement it was actually up on the day before the Central Bank announced these changes for interest rates and then Bitcoin is down 6% these two assets were almost on a straight path upward ever since the presidential elections in November in the United States Tesla for two reasons is having a decrease uh number one is that investor enthusiasm has calmed down because of higher interest rates that means that people looking to make an investment can now invest in a Ultra safe US Government Bond that's going to give them now more interest return compared to a stock that's riskier and then secondly when people are buying a car they're usually financing that purchase and with interest rates higher they're going to be less interested in purchasing cars that's going to be bad news for Tesla Tesla was already having to subsidize car buyers by giving them artificially lower interest rates at 0% and then it was having to pay for that on the back end now that's going to be even more expensive for Tesla to implement as interest rates are going to be higher for 2025 and 2026 so for all those reasons I feel this might be just the tip of the iceberg here for these overvalued assets that's what I think this could mean for investors if you I mean I was already skeptical of some of these overvalued assets as you've heard me talk about extensively over the last several months especially for Tesla I've been talking about how I felt it was overvalued but now that risk is even heightened because the central bank has taken a more restrictive stance on the economy realizing that things were getting a little a little bit Bubblicious things were getting out of control too much enthusiasm in the market and when there's so much financial asset price appreciation that leads to inflation because investors take those gains and they go out into the economy and they make purchases with those gains and that leads to higher inflation so be careful out there
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