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Holy guacamole, the summary of economic projections is out. This is the main part of the day today. Yes, Jerome Powell, we're going to cover the conference and the major headlines that come out in today's episode as well, not to mention discuss how the markets are reacting to all of this. So, don't worry, we'll get into it.
But, the summary of economic projections is the the big potential problem or the big positive for markets. And I do have to say, a lot of people are proven wrong by this one. So, we have a lot to get into in this episode. We will discuss the markets and everything you need to know. have not done so already, and let's begin.
Okay, so what you're looking at here on screen is the summary of economic projections, and the Fed just dropped a bombshell for investors. I say this is a bombshell because most people were not expecting the summary of economic projections to look like this today. Most people were expecting something a lot more hawkish.
And there are some surprising changes to the summary of economic projections today. Some changes that make you kind of scratch your head at least a little bit, and we'll get into that in just a moment. But, as I talked about in the video yesterday and last night, the Fed today really had the power to destroy the markets or to really help things out.
What I mean by that is the Fed today, they could have said, "Oh, yeah, this Iranian conflict, the inflation issues, like we might need a rate hike you later in the year." That would be like the worst possible scenario from today. We did not get anything close to that. In fact, it was much better than expected.
And again, as I explained yesterday, we could have gotten a scenario like this. In fact, that's exactly what I was expecting. This exact summary of economic projections. Um besides again, uh some areas here. First and foremost, GDP projections for December. That was the That was the last summary of economic projections back on December 10th.
Um yeah. In December, the Fed was expecting 2026 GDP at 2.3%. The Fed raised their target for GDP for 2026. Uh little bit of a head-scratcher there, considering Q4 GDP. We were expecting at 3%. It came in at 1 and a 1.4% and then it just came in at 0.7% last week. So, that's a head-scratcher, no doubt, but it definitely flies in the face of this recession trade that Wall Street has been pricing in.
Wall Street has been pricing in this recession trade now for the last couple of months, like consumer cyclicals underperforming, financials underperforming within the last 3 months. Both of those sectors within the S&P are down over 7% in the last 3 months. You know, people have been pricing in the recession trade.
So, the Fed's saying, "Yeah, no, you're going to have 2.3% 2.4% GDP now by the end of 2026." Uh you know, that's that's just not what a lot of people were expecting, especially as people are really concerned about private credit, the economy, a a potential recession. So, that is the the real head-scratcher out of this summary of economic projections.
I'm It's going to be interesting how people digest this. Look at the longer-run numbers as well. What this means is like 2030. Like what is the Fed's expectation for GDP every year for the foreseeable future. In December, the Fed was at 1.8% GDP growth. Now they're at 2% GDP growth per year. That's a 10% additional raise in GDP growth expectations for the longer run in which again, the economic data that that that we've seen recently has just not really looked great, right?
Um So that's a little uh little interesting. The unemployment rate uh those projections held steady at 4.4% for this year. They went up a little bit from 4.2% next year to 4.3% and 2028 numbers stayed the same. Longer run, they kept those numbers the same at 4.2%. PCE inflation uh headline was was revised up from 2.4% by the end of this year to 2.7%.
We expected this. Wall Street expected this. Core PCE was only revised up a little bit for this year from 2.5% in the December Summary of Economic Projections to 2.7% by the end of 2026 in today's report. So not that much inflation is expected by the Fed out of this conflict. This is what really matters, though.
The federal funds rate December projection was 3.4%. Today, it came in at 3.4%. So you can see that the the federal funds rate today is sitting at 3.5 to 3.75%. So the Fed is still projecting one rate cut this year. Okay? Which with everything going on is is kind of interesting. With the Summary of Economic Projection that we have here, it's it's really interesting because the Fed's projecting higher inflation, steady unemployment, higher economic growth, and still one rate cut.
So, that that's just a very interesting combination that the Fed is still saying, "Look, we're going to cut rates at least once." For 2027, the Fed is projecting to get down to 3.1% federal funds rate, so implying another cut or so. Maybe you could say around two cuts next year. 2028, the Fed is projected to be at 3.1% as well.
The longer-run rate, if there is anything that is really bearish out of this summary of economic projections, it would be in the December SEP, the Fed was projecting a longer-run kind of neutral rate at 3%. Now they say it's at 3.1%. That is likely due to not the Iranian conflict, but there are higher growth expectations for this year, which again, with the recent data that we've seen, doesn't make a whole lot of sense.
Okay, so that's interesting. What also is important to look at here is the range of estimates from Federal Reserve officials. So, you can see the central tendency. So, these are the highest and lowest estimates for the federal funds rate. So, back in December, the the the lowest target, the lowest range was 2.9% by the end of this year.
So, that would imply two three-ish rate cuts. Okay? Well, now the low end range is 3.1%. So, you know, around two cuts ish. Okay? The highest end range though is 3.6%. That is unchanged from December. So, the hawks on the the did not get more hawkish. They're still saying, "Look, I don't support a rate cut this year." That did not change.
You did not see any of the hawkish Fed officials say, "We should raise rates in 2026." And that was the real risk. The real risk heading into today for the for the markets was that somebody on the Fed would say, "We should raise rates." And you could see here, there is not a single dot that says we should raise rates this year.
Not a single one. That's really good. Today, it was reported that traders for the Bank of Bank of England or or the Central Bank over in Europe, that people are pricing in two rate hikes in Europe this year. So, that's where a lot of this nervousness came from in markets heading into this report because, "Oh if Europe's pricing in cut or hikes, then maybe the Fed's going to give us some really bad news and price in some hikes as well." So, this summary of economic projections, if there was anything to be like a little bit more bearish on, it is that longer-run federal funds rate projection moving higher.
But, this thing's kind of finicky, just like the whole summary of economic projections. It changes every time basically we get an SEP. So, you know, is that a reason to like freak out and sell stocks? No. Okay? So, on net, this summary of economic economic projections was much better than expected. But again, some head-scratchers here.
Like, how is the Fed now projecting stronger growth in the economy versus where they were in December with the kind of labor market numbers that we've seen, the kind of retail sales numbers that we've seen, right? The GDP numbers that we've seen for Q4. That part doesn't make a whole lot of sense. So, uh uh we're going to need that explained a little bit.
Now, also worth mentioning, the thing that really changed the longer run inflation expectation or longer run inflation target was look, somebody in December was saying the longer run neutral rate is 2.8%. They raised that to 2.9%. Nobody raised their higher end target from 3.5%. So, it's not like anyone said you know, the neutral rate has changed materially.
Just a one point increase from the lowest estimate caused the total number to move higher. So, again, if this is something you're bearish on, you should probably reconsider that. Again, . We'll discuss what all of this means for the markets as well once we get through Jerome Powell's headlines. Okay, now let's get into some of these headlines from Jerome Powell that are moving the markets today.
Jerome Powell says implications for the Middle East developments are uncertain. Powell says consumer spending is resilient and the unemployment rate has changed little since last summer. Jerome Powell says that inflation expectations in the near term has have risen. He says that last year's rate cuts bring us to a plausible estimate of neutral and he says near term higher energy prices will push up overall inflation.
Jerome Powell says this year it is really important to see progress on the reduction in goods inflation to understand if we are making progress. Jerome Powell says we are well aware that a series of inflation shocks has interrupted the progress that we have made over time. There will be some effects on inflation coming forward.
Powell says it is too soon to know the scope and duration of energy market effects on the economy. Jerome Powell says that past rate cuts should help stabilize the labor market. Jerome Powell says that the inflation overshooting is mainly from goods and tariffs. Powell says the Fed is looking through oil prices or if the Fed is looking through oil prices depends on inflation expectations and the broader context of 5 years above target.
So Jerome Powell is saying, "Look, we've been above inflation targets for 5 years. If inflation expectations become unanchored, then it this oil price shock would be something that we would not necessarily look through." But it does sound like the Fed is is trying to look through it at this point. Jerome Powell says, "If I don't see inflation progress, you won't see the rate cut." Jerome Powell says some of the oil shock will show up in core inflation.
Again, that is because everything is affected by energy. Anything you can buy in a store in one way, shape, or form is impacted by uh oil, energy, gas prices, literally everything. Jerome Powell says, "I really want to emphasize that no one knows the economic effect of the Middle East conflict." He also says there is no conviction on what people are writing down in projections.
Jerome Powell says, "We're very strongly committed to keeping inflation expectations anchored at 2%." He also says we're waiting for the tariff pass-through process to go through the system so goods inflation returns to previous levels. Powell says, "Net of the oil shock will still be some downward pressure on spending, employment, and upward on inflation.
After 5 years above target, you worry a shock could cause trouble for inflation expectations." On the policy rate, he says, quote, "On the borderline of restrictive and not, waiting for tariffs to go through the system so goods inflation returns to previous levels. Don't want too restrictive policy because of downside labor market risks, balancing the risks." And Jerome Powell says, "We are in a difficult situation." Jerome Powell says disinflation in goods is not coming from restrictive policy.
Jerome Powell says that it that it is {quote} frustrating that non-housing services inflation hasn't come down. Labor market is clearly not a source of inflationary pressures. Jerome Powell says I would not say employment is more at risk than inflation. So, he he he's really saying that the risks here look pretty balanced.
Now, markets did not like that headline and did take a candle lower on that. Jerome Powell says being well above the 2% inflation target is a concern. Powell says if no Fed chair is confirmed by the end of my term, I would serve as chair pro temporary, basically. Wow, that's that's that's interesting.
Powell says he has no intention of leaving the Fed board until the DOJ probe is over. Jerome Powell on assessing the labor market says {quote} we need to put together the January and February reports. Jerome Powell says a good number of people on the Fed committee are concerned about very, very low job creation.
Jerome Powell says we're watching this zero job growth equilibrium carefully and we can argue it's a consequence of deliberate policy on immigration. Jerome Powell says this energy supply shock is a one-time thing. Fed Jerome Powell says the vast majority of participants don't see a hike as a base case.
In fact, if you look at the dot plots within the summary of economic projections, nobody is uh pricing in a rate hike at this point. Jerome Powell says the possibility that the next move might be a hike did come up. At this meeting, {quote} a number of people mentioned that short-term inflation expectations rose.
Jerome Powell says everyone does agree that they will watch inflation expectations extremely carefully. Fed Powell on long-term inflation expectations says quote the majority of things we look at show they are solid. Jerome Powell says the growth upgrade is likely due to growing confidence in productivity.
Jerome Powell says stagflation of the 1970s is not the base case right now. Jerome Powell says we're trying to manage our way through the tension between two goals, but this is not stagflation. Powell says I don't have a forecast for oil prices after the war ends. Good thing we do have the WTI December futures contract for oil that's sitting at about $78 a barrel.
So presuming the conflict is over with by then, Wall Street is projecting oil to be around $77 per barrel, which would still be elevated, but definitely down from over 100 where it is today. Powell says we hope the gas price increase is not for a long period, but don't want to speculate. Jerome Powell says we have to be humble about the timeline for tariff pass-through.
He says we don't know how long it will take for tariffs to go through the economy. Jerome Powell says I have slightly more confidence that tariff inflation will come down in the middle of the year. So those were the big headlines from Jerome Powell. The S&P really sold off for most of the conference, kind of recovering a little bit right now, but bottom line is this Fed event was exactly as I expected it would be.
Literally down to a T. Besides, I was expecting the Fed to take down their expectations for GDP for 2026. They raised that. Other than that, this is exactly what I expected. This is exactly what I expected Powell to say. I expected Powell was going to have some good headlines, some bad headlines, but it wasn't going to nuke the markets with a rate cut like as a base case expectation.
You know, there were a lot of people expecting the Fed not to price in any cuts at all. The Fed did not change their expectation for Fed cuts, and they basically said, "Look, anything's possible here." And again, there were some really good headlines and some really not great headlines. Like, not great headlines are the ones talking about the possibility of a hike came up.
But, it seems like we're far off of that being a base case assumption at this point. From a market's reaction perspective, this is also what I expected. I said, "Look, I'm bullish on the Fed meeting, but I'm not necessarily bullish during the conference or for Thur- or for Wednesday. I'm more bullish for Thursday and Friday.
I said this over and over and over and over again, okay? Why? Because do you know how many times I've seen a Fed conference just like this one, some bullish, some bearish headlines, and then nine times out of 10 the markets sell off anyways, no matter if it's good or bad, following a uh Powell press conference.
And then what happens? Nine times out of 10 people overnight, the next day they realize, "Oh wait, this better than we thought." And they go out and buy the markets. That's my expectation here. See, what happens especially during the Powell press conference is you know, headlines are hit- are hitting the markets so fast that there's some good headlines, there's some bad headlines, and it's not like every fund manager in the world is is watching the headlines as they come out.
So, it takes some time for people to get the general concept of what happened at the Fed meeting, right? What Jerome Powell said, and that's why, you know, even if you get a really good press conference it doesn't get priced into markets immediately. Now, I wouldn't say this was a really good press conference, but it was definitely better than Wall Street is projecting or or has been pricing in.
I say this because we know this as factual, okay? In the last 3 months, financials are down 8%, consumer cyclicals are down 7.3%. Consumer cyclicals tied to the economy. So, basically people are saying, "Yep, we're going to have a weaker economy." What did the Fed say in their summary of economic projections?
They said, "No, you're going to have a stronger economy and we're still going to cut rates." Now, it's up in the air to what's going to happen at the next meeting or 6 months from now. Like, you just never know with the Fed, right? No matter what kind of environment it is, the Fed's always going to tell you that they're willing to, you know, adjust policy at any point.
The Fed has never once came out and said, "We are on a direct path to cutting rates no matter what." We were going to hear this ambiguity from Powell. We always do. But, what's important from an equity investor perspective is what was priced into markets and what did we get? So, we got unemployment that stayed the same, GDP that went higher consumer cyclicals are down 7.3% in the past month.
Wall Street has been bracing for this recession trade and the Fed quite the opposite said recession is nowhere near here. So, I think that alone creates a tailwind for equities. Not to mention, a lot of people were nervous, especially before this conference today by Powell, that Powell would signal maybe we're going to hike rates later this year because the ECB is now pricing in two rate cuts or two hikes for this year and we did not get that from Powell.
It still seems like we are quite a distance away from rate hikes. But again, I think it's very important to acknowledge this. 90 plus percent of the time we sell off after the Fed regardless. And these Fed conferences by Powell take some time for Wall Street to digest and reposition in markets accordingly.
The bottom line here is we were spot-on on this channel predicting what this Fed meeting was going to look like. And you know, you got to take it in context of where the markets are at, right? Like if the markets were pricing in two rate cuts and we got this conference, this summary of economic projections, you know, there would likely be downside ahead for the markets.
But markets are really bearish. Wall Street is really underweight risk assets. They've been overweight the recession trade for many months now. There's a lot of again bear just bears out there. People are really bearish right now. And what we got from the SEP was higher growth expectations. Still again, one cut being priced in.
Uh so, all else equal, this was a better-than-expected or at least better than feared uh press conference from Powell. Like what did anyone expect, right? We weren't going to hear a Powell that was going to give us two rate cuts or three. We got what a normal person would expect plus, you know, that higher growth expectation looks really good.
And I think if if we get upside from from this, it likely comes from the fact that the recession trade has been so highly priced into this market at this point, and that is just nowhere close to the base case expectation from the Fed. So, net-net, I expected the markets to sell off after Powell. Normally, that happens.
It's not a surprise. But, I do think coming tomorrow and Friday are are are going to be the bigger tells, right? As I said in previous videos, I don't care what happens Thursday after the Fed. I care about what happens or Wednesday after the Fed. I care about what happens Thursday and Friday. Like, do markets take it positively?
Now, during the Powell press conference, there was some news of attacks on Saudi Arabia. Looks like energy infrastructure as well. That seems to be another driver, right at about the same time that Powell came on. So, it's hard to know exactly what the market's reaction is strictly from Powell. But, yeah, this is a big win for the bulls.
This is a big win for anyone in risk assets. And again, I don't give a rat's ass that the markets are down 1.1% right now. You know, what we actually got was a big win. Okay? Big positive. Better than I expected, to be honest. ection. Hit the like button, as well as subscribe to the channel if you guys have not done so already. Have a great rest of your day, and I will see you in the next one.
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