Tom BilyeuThe Fed Just Did the Most Expected Thing — And It Might Be a Huge Mistake
Tom Bilyeu
Fed Raises Rates To 3.75-4% 0:00
The Federal Reserve's FOMC voted to raise the target range for the federal funds rate by a quarter point, up to 3 and 3/4 to 4 percent, the first hike since July 2023. The policy statement described economic activity as expanding at a solid pace, with resilient spending, strong productivity growth, robust capital investment, and job gains keeping pace with the workforce. The commentator frames this as the most expected move possible, but questions whether it is wise, calling it possibly the beginning of a mistake that gets walked back quickly.
Two Different Economies, One K 1:00
The central tension raised is that people on the upper side of the so called K shaped economy feel optimistic about growth, while people on the lower side do not feel things are going steady. Consumer confidence is described as low, whether people are asked if they expect to have a job in a year or whether they can make ends meet. The commentator points out that official jobs data looks much worse once you count people who have simply stopped looking for work, since labor force participation drops sharply when those dropouts are included. Because economic decisions like spending, borrowing, and buying a house are driven by feeling rather than data, ignoring how the bottom of the K feels is treated as a major blind spot in the Fed's reasoning.
Comparing To Japan's Stagnation 3:31
The discussion turns to Japan as a case where decades of stimulative low rates failed to spark growth, because psychology, not physics, drives economic behavior. Japanese companies did not take advantage of cheap money even as foreign investors around the world snapped it up. The lesson drawn is that fear versus optimism about the future determines economic outcomes more than the rate itself, and right now there is seen to be more fear than optimism in the system, including trepidation among investors about whether markets are in a bubble.
Is The Oil Shock Really Temporary 6:31
Chair Jerome Powell's remarks describe the economy as resilient despite geopolitical shocks, treating supply disruptions like the Middle East conflict as something to look through since they are expected to be temporary. The commentator challenges this, noting the conflict is already six months old, Trump has repeatedly claimed it is over without it actually ending, and new attacks continue from Iraqi militias and Houthi forces. Meanwhile Russia has stopped diesel exports, Saudi Arabia has cancelled some crude exports to Europe, and the US is rumored to be considering slowing its own diesel exports. Since energy underpins the whole economy, raising rates cannot bring down inflation if that inflation is being driven by a sustained energy disruption rather than excess spending.
Labor Data Hides Real Weakness 11:31
Powell cites a 4.1 percent jobless rate, rising job openings, and unemployment claims consistent with full employment as signs of strength. The commentator counters that this framing relies on not counting people who have dropped out of the job search entirely, which used to be a reasonable assumption when dropouts were mostly retirees or injured workers, but now increasingly includes young people giving up on finding work. This is described as a sign of weakness rather than strength, and is tied to concern about the growing debt burden, now over 40 trillion, with interest payments already the single biggest line item.
Two Real Sources Of Inflation 13:33
Powell states inflation has run above target for over five years and remains too high, citing PCE inflation around 3.6 percent in August. The commentator argues the current inflation is being driven by two forces unrelated to overheated demand, tariffs and oil disruption, neither of which rate hikes can fix, summed up as asking how many rate hikes it takes to open the Strait of Hormuz or calm the Houthis. Reports of consumer pullback at retailers like Walmart are raised as evidence that savings are running out, which is offered as a reason Trump reportedly wants to send people five thousand dollar checks, both to influence votes and to keep money circulating before psychology worsens.
Projections And A Possible Illusion 22:01
The Fed's summary of economic projections shows real GDP rising 2.3 percent this year and 2.4 percent next year, with total PCE inflation at 3.7 percent this year falling to 2.3 percent next year, and unemployment holding near 4.1 percent. The commentator calls the GDP numbers weak and pins hope for growth on AI productivity gains, while noting Trump's push to bring jobs back to America will likely raise prices for a couple of years during construction phases. The bigger worry raised is that inflation could appear to fall not because policy worked but because a crisis driven pullback forces stores to cut prices as people run out of savings, which would look like success on paper while masking a worsening recession.
A Task Force On AI 28:00
The Fed chair mentions setting up a task force meant to report by the end of the year, looking at how the economy's demand side and supply side are being reshaped, likely by AI. He is careful to say that the actual policy choices about risks and rewards belong to other parts of government, not the Fed, though those choices will still affect the Fed's own work.
Debt, Stablecoins, And Tariffs 28:30
Asked about growth running below the hoped-for 4 percent, the response points to the enormous debt burden pushing the Treasury toward unusual moves, such as shifting debt to short-term instruments to control rates and pushing stablecoins backed one-to-one by US debt through efforts like the Clarity Act and the already-passed Genius Act. Tariffs are framed as part of a protectionist, "Hamiltonian" strategy to rebuild US factories, which will raise costs for a couple of years. AI is expected to carry most future growth, and if it fails to deliver, interest on the debt compounds into a spiral that speeds up the move away from the dollar.
Why Bond Yields Are Rising 30:00
Asked why long-term yields have climbed since the last Fed meeting, three reasons are given: economic strength, competition for capital from hyperscalers raising huge sums for AI investment, and geopolitics, including energy price spreads tied to global hot spots. The commentary adds that the 10-year yield has already jumped from about 4.6 to roughly 5.02, reflecting eroding trust that inflation will be controlled, since real wage growth for the middle class isn't there to justify it. The situation is compared to the debt overhang after World War II, which was only resolved through growth combined with financial repression, keeping interest rates below inflation, something that only works if the real economy grows faster than the repression.
Oil Shocks Complicate Rate Policy 36:00
The discussion turns to ongoing disruptions: Saudi Arabia's east-west pipeline likely offline for months, the Houthi blockade in the Red Sea, and continued Russia-Ukraine conflict, all pushing oil and broader prices up in ways a rate hike cannot fix. Pressed on this by a reporter, the Fed chair concedes a quarter-point hike cannot reopen the Strait of Hormuz, but says the goal is preventing price changes from broadening into second and third-order effects.
Consumer Confidence Versus Fed Data 40:00
Charts from Jeff Snider at Eurodollar are shown to argue that consumer confidence, especially in the University of Michigan survey running since the 1960s, has been falling since the Sam Rule triggered in mid-2024, with Americans reporting fear of unemployment at levels normally seen only in recessions, even though none has been officially declared. Labor force participation is cited as a hidden weak spot, with more young people opting out than the metric was designed to track. The closing point is that if store prices start falling because struggling consumers can't spend, that deflation could be mistaken as proof the rate hike worked, when it would really stem from people running out of money, making the hike a mistake dressed up as a success.
AI-generated summary. It can be wrong or incomplete - check anything that matters against the original.
