A Major Interest Rate Decision is Coming Wednesday

In today's video, let's review the CPI inflation reports that was released on Friday and what this means for Wednesday this week. Wednesday, September 16th is going to be a big day. So that's when the Federal Reserve announces whether they're raising interest rates or not. And of course, that decision is going to have major consequences on the stock markets, on precious metals, on crypto, on the bond market, the economy, etc. So let's begin. So for the month of August, here's what the CPI inflation report said. The expectation was that the rate of inflation would come in at 3.4%. It came in at 3.4% in line with expectations. Core inflation, which doesn't factor in food or energy prices, came in at 2.4% annually and 0.3% monthly. Now after the release of the report, the odds that the Federal Reserve will raise interest rates on Wednesday jumped up substantially. Now a very good question is why did this happen? Because again, headline inflation came in line with expectations at 3.4%, right? So the reason is because the expectation for core inflation was 0.2% and it came in hotter at 0.3%. Okay, so before the inflation report was released, the market odds were a 59.4% chance that the Federal Reserve would raise interest rates on Wednesday. That's now jumped up to a 92.3% chance that they're going to raise interest rates. Now before the inflation report, the odds were a 40.6% chance that the Federal Reserve would keep interest rates the same. Now it's decreased to a 7.7% chance. So we're going to get back to the Federal Reserve, but first let's take a look at the CPI inflation report. I want you to take a look at how the rate of inflation has been over the past few years. We're well off the 2022 highs, but as you can see, the rate of inflation has been re-accelerating. So the re-acceleration started when Trump began attacking Iran. It cooled down when Trump started de-escalating, but now it's re-accelerating due to the renewed conflict. And I want you to keep in mind that the rate of inflation was 3.4% and that's for August, okay? Now I want you to keep that in mind because the recent spike in energy prices, that's going to appear in the September reports and that's going to be released in October. So the numbers are like in terms of real time, the numbers are lagging a bit, but I want you to know that it's just going to get worse from here. Now compared to a year ago, the energy index was up 16.3%. Gasoline prices rose 27.4%. Diesel fuel was up 52%. I do want to mention that it's gotten even worse in September. Again, we're going to see those numbers in October. Shelter is up 3.0%. Clothing went up 3.6%. Food prices went up 2.7%. Transportation went up 2.4%. And new vehicle prices are up 0.6%. Now I do want to point this out. This is, I guess, a dose of reality. Even though the government is reporting that the rate of inflation is at 3.4%, I'm skeptical. I don't know about that because I want to show you the supply. So this is basically how much money is out there in existence. And this is worth noting because the CPI inflation report does not measure the change in prices. No, it measures the change in the cost of living, which is calculated from surveys and estimates and changing calculations, which I'm basically saying that it can be manipulated to say the least. So I'd rather look at how much money is out there. So I've zoomed into the M2 money supply since the start of this year. So this is a year to date chart, at least up until the end of July. So the money supply has grown by 3.59%. That's year to date, which means that the money supply is growing at a rate of 6.2% a year, you know, annualized. And we have the government telling us that inflation is running at a rate of 3.4%. So I see a big discrepancy. And listen, I just want to say that this is typical because generally when the government says that this is the rate of inflation, if you want a shortcut of what the true rate of inflation is, just double what the government says and it's slightly under there. So for example, in 2022, when they were reporting the rate of inflation around 8%, then just double it to 16% and slightly under there. So when they said 8%, it's closer to 15%. This is my opinion. So right now they're saying 3.4%, right? But if you look at the money supply, it's at 6%, six something. Now let's focus back on the Federal Reserve because the CPI inflation report has shifted the odds highly in favor of the Federal Reserve raising interest rates on Wednesday. And if they do that, there's going to be consequences. Well, I mean, there's going to be consequences with either decision, but I want to expand upon this. So you have to remember that President Trump gave Kevin Warsh the job of being chair of the Federal Reserve. And the only reason why Trump nominated Warsh was to lower interest rates, which President Trump is obviously still pushing for. And if the Federal Reserve raises interest rates, another thing is that it's going to cost the federal government's a lot more money in interest expense. Because you have to remember that the federal government is in debt for $40 trillion. And the government has to pay interest on that debt to whoever they lent that money from. And I just want to bring this to your attention that the government has been refinancing more and more of their debts to short term debts. So these are known as treasury bills or T-bills. And they have maturity dates of four weeks, eight weeks, 13, 17, 26 and 52 weeks. So essentially, the government has been doing a lot of short term borrowing. So absolutely, this is going to affect the government's finances in a meaningful way. So as the government's T-bills matures, then they're going to be refinanced at an interest rate of 4.0%, which is higher than the 3.7% that they were getting for the greater part of the year. And that's going to make a big difference when we're talking about trillions of dollars of debt. And I do want to say that although the odds are highly skewed towards an interest rate increase, I do want to show you these stats and you could do with them as you please. The market odds are highly in favor of a rate hike, right? But I want you to see this to understand how big of a deal it is. In the past 12 most recent midterm elections, the Federal Reserve has raised interest rates four times near the midterms, which is about one out of every three times or 33.3%. Now, near the midterms is defined as starting on September 1st to the midterm elections, which is going to be on November 3rd this year. And we're only talking about the midterm elections, we're not talking about presidential elections in this viewpoint. So of the four times of the 12 that they raised interest rates, two of those four times were due to elevated rates of inflation. That was in 1978 and 2022. In 1978, when the Federal Reserve raised interest rates, the CPI rate of inflation was at 7.9% right before the midterm elections. In 2022, when the Federal Reserve raised interest rates, the CPI rate of inflation was at 8.2%. And right now the CPI rate of inflation is allegedly at 3.4%. But in September of 1978, the Fed Fund's interest rate was at 8.5% and CPI inflation was at 7.9%. In September 2022, the interest rate was at 2.5% and the rate of inflation was at 8.2%. Right now, going into the Federal Reserve decision, the interest rate is at 3.75% and the rate of inflation is at 3.4%. So will this warrant an interest rate increase on Wednesday? Well, we're going to find out soon, aren't we? But again, of the past 12 midterms, the Federal Reserve raised interest rates four times, two times were due to high inflation. Now, I want to conclude by saying that I still got my wager going on against the odds, but of course, again, it's a tiny bet. But wish me luck and fortune. Thank you so much. Please subscribe and I'll be covering the press conference on Wednesday. Thank you so much and I wish you a very nice day. Take care.