In this video, we cover the main highlights from the FOMC Press Conference that took place July 28. There were a few surprises out of this meeting, one of which I've been predicting for a while. First, they are now officially setting up two standing repo facilities. Second, Powell defined "transitory" as referring to the rate of change, not the absolute price level.
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Transitory Inflation https://youtu.be/573YaX__bSI
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See Full Video Transcript Below
What's up everybody my name is Joe Brown and this is heresy financial we got really two big surprises from pal today the FOMC meeting concluded came with a press conference answered a bunch of questions and really there were two things that happened during this press conference that personally I was very shocked and surprised about so obviously we've got the boilerplate stuff that nothing changed on interest rates nothing changed on their asset purchases there are two main things though that I want to focus on that I think were significant that came out of this meeting one of these is that they announced two new standing Repo facilities now if you've been around the channel all you know I've been talking about the Repo market consistently I've done a couple videos on it within just the past couple of months and this is something I've been talking about because they announced that they were potentially going to open up a standing Repo facility a couple of months ago and I've been saying since then that they are going to start doing that they're going to actually put those plans into place at some point and they just announced confirmed that today the reason this is significant is because right now it's the Reverse Repo facility that is being used it's Reverse Repos that are blowing up we've got almost a trillion dollars in overnight usage and a Reverse Repo now I'll link my previous videos on this below but if you just the most basic understanding of the Reverse Repo market is that right now financial institutions are using the reverse Repo market to get their hands on collateral when cash deposits are made at banks that's a liability on the balance sheet for the bank in order to hold a certain amount of liabilities the bank is required to hold a certain amount of collateral a certain amount of capital is collateral usually they use treasuries as their collateral well there are for a number of reasons there's not as much collateral compared to the amount of cash in the system right now one of those reasons is due to the fact that the Federal government has been spending out of taxes and the treasury general account they haven't been issuing a lot of new debt as much as they usually do and so there's just not as much cash in the system I'm sorry collateral in system because of because of that and so banks financial institutions they're going through the Reverse Repo facility right now and the Federal Reserve is kind of the one that's offering that collateral in exchange for the cash and Reverse Repo usage is historically not used very much but as soon as the capital requirements were reinstituted at the end of march on banks because they had like a for Covid they had a period of time where they didn't have to hold as much collateral there was no requirement that requirement was suspended that ended at the end of march and that's when Reverse Repo usage started to shoot up well I've been talking about how that is temporary and how that is going to have to end especially once the federal government my original estimate was when they drained the treasury general account when they get that back down to the 400 400 billion dollar mark which is where it used to be before it blew up for covet and recently because of the debt ceiling issue I have been talking about how it's probably going to take even longer now and if we if you take a look at this you can see that Yellen you know Yellen's been talking to congress about this she urged them hey if we don't raise the debt ceiling or suspend it again we could potentially have a default on our debt now the congressional budget office came out and they said okay well we can last our emergency funding will last until like October or November and so it's it's not likely that congress will be able to find a way to resolve the debt ceiling issue before they go on recess in three days now and before July 31st which is when the debt ceiling suspension ends and so at that point they'll have to start relying on emergency funding and some of their extraordinary measures but they really have until October or November to resolve it before any debt default issue comes up so I don't anticipate any debt defaults happening here but essentially what's going on here is once that's resolved which could be anytime between now and October and November once that's resolved the federal government will start borrowing like crack addicts again will start borrowing heavily they'll start that means when you bar when the federal government borrows they create a treasury that means all the money that they're spending then they're also introducing collateral into the financial system that can offset that on bank's balance sheets once that starts to happen that'll be kind of like the peak of the pendulum and it'll start swinging the other way usage in the Reverse Repo facility will naturally start to decline it will start to swing the other way and this is why I said that the Federal Reserve was going to preemptively set up these standing Repo facilities because they're not necessary now they're not even being used right now there's no need for it right now because right now the need is for collateral Repo facility is when you need cash you're going to go to the Federal Reserve their Repo facility for that right now they've got lots of cash they need collateral so they're using reverse Repo so they're preemptively setting up these two standing Repo facilities one's domestic ones international and that is because they understand very soon here it's going to swing back the other way and there's going to be a scramble or there could be a scramble for cash instead of collateral and so they're setting up these Repo facilities in anticipation of that so that any financial institution that is start for cash or needs cash or has they have the ability to go get it and we don't have a Repo market spike like we had in September of 2019 where there's a scramble for cash or a lack of liquidity and they want to be able to have that set up ahead of time basically instead of being the lender of last resort instead of being there to back up the markets they're increasingly becoming more involved and kind of infiltrating every area of the market to where they're kind of absorbing the whole financial market on themselves so that was a surprise to me that they announced that this early but they got it set up probably just in anticipation of whenever this debt ceiling issue is fixed that's when the pendulum will kind of have reached its peak so that was the first thing the second thing that was a surprise to me was that Powell he defined what transitory meant and it was funny if you were watching it they were he's always giving really vague explanations and opaque descriptions of things like there are a lot of softball questions usually lobbed up to pal during these press conferences like one of the questions was let's see what was the question he said oh yeah what does a substantial further progress mean you know Fed has talked about you know until we make substantial further progress towards our goals we're not going to do anything about inflation blah blah blah so they're like hey what does that mean and he basically said we're not going to we don't have any specific numbers to give you so they're basically you know winging it so they're always giving answers like that pal is always saying things that are very vague and opaque but somebody asked I'm glad they asked a little bit harder questions this time not you know nearly as hard questions as they should but one question was you've been saying inflation is transitory what does that mean and he basically said what I said in my last video on inflation which is transitory the word transitory refers to the rate of change for inflation transitory does not refer to the absolute level of prices and he very clearly articulated when we say inflation is transitory we mean prices are going to jump up and then they'll stop increasing and he explicitly said transitory does not mean that we expect prices to fall again so very clearly Powell laid out that his definition then the Fed's definition for transitory inflation refers to the rate of change meaning they fully expect that prices are increasing right now prices will continue to increase at to a certain point and then they'll stop increasing and will not go back down he confirmed the federal Reserve expects prices will be permanently higher and this current rate of inflation the current change in prices the rate of change will continue until it stops you know whenever that is that's what transitory means and then from then on prices will go back to increasing at the regular rate of you know on average two percent and so the whole transitory narrative it's very cleverly deceptive because it it rules people into a false sense of security that you know hey these people at the Federal Reserve that are supposedly experts and they've you know you know they've got control of the economy they're you know they're telling us that this these higher prices are temporary and that we'll be able to afford life better later on and that's just not true prices are permanently higher now the last question that I'm really glad was asked during this press conference was would the Federal Reserve start to try and deal with inflation if it looked like inflation was running out of control even if the labor market hadn't met their goals yet even if they hadn't reached maximum employment or reached substantial further progress with you know their economic metrics and so basically the answer was well we expect that our goals will be met so completely dodged the question didn't answer it and really it comes down to this if the federal Reserve tries to do anything to clamp down on inflation it will crash everything we'll get a deflationary death spiral that's just the nature of how these things work when you create market distortions and you do not allow the froth to fizzle out you do not allow the male investments to encounter bankruptcies you don't allow any of the small you don't allow any pruning for the health of the tree you don't allow any small fires and all the dead wood burns up eventually what happens is you encounter a devastating forest fire that wipes out everything and the fact of the matter is that we've had a lot of intervention and that intervention has allowed a lot of dead wood to build up in the economy over the past 20 maybe even 30 years now and every time there's been a catalyst that has gone in and you know you start to see some of these things unwind and some of the pent-up destruction start to make its way through the economy you see even more intervention to stop that from taking place you see more printing you see lower rates you see more bailing out of the economy you see more debt being purchased by the Federal Reserve debt that would be you know it would be junk it would be zero rates would be sky high and so what the fact of the matter is if they do not at the very least continue the intervention that they're doing continue the monetary expansion continue with the asset purchases and the low rates we will get an unwind we will get a deflationary death spiral that's just the consequence you've been building a bigger and bigger and a bigger dam to hold back the waters that are continuing to rise and if you don't continue to build that higher dam eventually the water will start spilling over so you have to build a bigger dam but eventually it gets to the point where the dam just breaks and all everything that you've been holding back all of those pent-up forces will be released all at once and the destruction that it'll cause is way worse than if you would have just let the river flow naturally before you know as it was before you built that dam so that's essentially what's going on with his answer of why you know are you going to do anything about inflation even if we haven't met or you know you haven't met your goals with substantial further progress on labor markets and stuff is because basically they can't they can't do anything about inflation especially if they haven't met their other goals because it will it will only make everything else much worse so it'll cause a stock market crash real estate market crash you know everything deflationary death spiral and so ultimately that is the reason why he completely deflected that question and didn't answer it because they can't do anything about it so I really enjoyed the little bit harder questions this time I wish they'd get a little bit harder but those two big surprises number one they're you know opening up those standing Repo facilities one domestic one foreign that's something I've been saying they were going to do for a while and they're doing it now in anticipation of the Federal government starting to issue new debt again and having that pendulum swing the other way from a need for collateral to a need for cash the other thing was the definition of transitory that the Federal Reserve admitted prices are going up and they're never going to come back down they'll at the very best just keep on going up at a slower rate than they are right now so as always really appreciate you guys thank you so much for watching have a great day
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