US Economy Update – Federal Reserve Interest Rate Update

by birtanpublished on September 20, 2020

Hi i'm jimmy in this video we're going to look at some recent developments that have happened with the u.s economy and some things that have come out of the federal reserve that will likely have a very big impact on

The stock market for a long time okay so there are a lot of things that affect the broader economy and i'm sure we all understand that and on this channel we do a monthly

Analysis where we go through different leading economic indicators to try to sort of score where the economy is at and i find that personally i find that in that research to be very interesting

And helpful but i thought it could make sense to go beyond the numbers and to look at the current economic situation that could lead us for the next couple years

And hopefully we can use this information to make more informed investment decisions and ideally get us closer to our goal of achieving financial freedom okay so first we have the job situation

Now unemployment is sitting at about eight point four percent right now and that's clearly a bad thing especially when we consider that before the coronavirus happened unemployment was less than four percent

And when we look at unemployment going over the past 10 years well it hasn't been this high since the economy was coming out of the financial crisis of 2008 and 2009 so it was about 2011 or

2012 when it was back this high and like most economic recoveries it took a long time for unemployment to get back to a reasonable level now of course this recession is a little bit different

Because the world was sort of forced into it by the coronavirus so that helps explain how it got up so fast and also why the decline has been fairly sharp as well

And this is a good thing but when we shift over to initial jobless claims well we can see that jobless claims are still quite high now they are declining so that's a positive thing

But as of the most recent number that's they still lost last week 790 000 new jobless claims were filed so that's a big big number now i also should point out that they're actually two different jobless claims

Numbers if you were to google it you might see a headline that looks something like this and they're saying the number is actually 860 000 and this is true but the key difference

Between their number and the number that we're looking at here is their numbers is adjusted for seasons so they're it's seasonally adjusted our number is not seasonally adjusted so

These are just what was the actual number now the seasonally adjusted number isn't necessarily right or wrong it does make sense to adjust those numbers on a seasonality basis

Since there are some jobs that come out in the summertime that simply aren't there in the winter and same as same as true vice versa so i understand you could really use either and if we were

Curious when we shift over to the other number it doesn't look that far off so this one is seasonally adjusted and if we were to switch back and forth for a second once again they're not that different so

If you're ever curious why this number is different than what you might see in the headlines that's probably the reason okay so long story short the job situation is improving but it's not great and it's

Probably going to take a long time now if we were giving a point to the bulls or bears i would still give this point to the bears in this scenario because these are a lot of jobs to be losing

Unemployment rate is still very high and i think that the decline that we've seen in jobless claims or unemployment is going to begin to level off because some jobs simply aren't going to

Come back that fast and this brings us to the federal reserve so the fed recently released a statement where you might have seen headlines that look something like one of these

Basically they're saying that they're going to keep interest rates near zero through 2023. now if we were to think about it that's actually not that surprising i'm not really sure that's headline worthy news

Since if we think about this chart this is the fed funds rate going back to right after the financial crisis and look at how long they kept interest rates

Fairly low sure it's lower today but still they kept them there for a long time but here's one of the interesting things that did catch my attention so many professional investors pay very very close attention

To what the federal reserve says after all i think we can all agree that the federal reserve has a huge impact on the economy and on the stock market so if you're doing that for a living why not pay

Close attention to what they say and one thing that i used to have to do when i worked at some of the smaller firms that really didn't have the resources to pay for services that do this for you

Is you would compare one fed statement to another fed statement to see what has changed now i'm not talking about the general tone from one statement has changed

To the next i'm talking word for word what did they change to illustrate going back to january of 2020 of this year so it's this year before the coronavirus really hit this is what the statement looked like

As we scroll through this one well we can see that they first changed the month that they were talking about that's an obvious change then they changed the word from strong to moderate

And i'm sure that made a whole bunch of headlines back then and then they adjusted the wording around inflation okay so as we can see there's not too many changes from one statement to the next

And if we look at september of last year well that statement once again this time we've highlighted the changes these are the two changes side by side and as we can see just from

A cursory glance there are not too many changes now they did add this paragraph down here and usually that's what you're looking for when you're analyzing these statements

It is what are they changing what are they adding what are they taking away because that will give us an indication of where they're heading but as the economy gets in trouble very often the fed has to

Do more so they have to explain themselves well this is what the september 2020 statement looks like that came out just a few days ago and as we could see they made a ton of changes

In some cases they deleted paragraphs they added or at least replaced some other paragraphs now of course it's not the the fact that they're making changes that is in itself a big deal it is the fact that

We know that they're making changes because they are changing things on the fly let's call it we know that they're doing this because they're trying to adjust as the economy needs adjusting call now

I've spoken in previous videos where we talk about the fed saying that they're going to adjust how they look at inflation basically they're going to use average inflation versus actual numbers which in theory will lead to higher

Inflation over the long run which ideally is not it's not a great thing that really should be avoided if they can help it now what's making the most news out of this particular

Report is this section right here and basically what they're saying here is that the federal reserve has decided to keep interest rates near zero until unemployment gets to what they

Define as maximum employment now my concern with this is what if the unemployment rate which has been dropping at a fairly decent rate begins to it begins to drop

More slowly in theory it could take many years to get back to let's say four percent unemployment and if that's the case are they going to keep interest rates near zero that whole

Time it sounds like that's what they're saying now from a stock market perspective well this should lead to a higher stock market and we've seen this already in

2020 look at how high the stock market has already gone despite the fact that the broader economy doesn't really warrant a stock market near all-time highs

Another serious change to consider that could happen is that debt could seriously get affected now of course debt is already broad debt i'm talking about is already in this situation but every

Now and again i come across a comment on whatever youtube video and people are talking about how bad debt is but i would make the case that not all debt is created the same for example

If we were to start a company and that company we needed money to get started and perhaps we had some savings but we wanted to borrow a little additional money we've decided that we can afford let's

Say a thousand dollars a year in interest payments we don't have to pay the principal to the end much like a typical bond let's say 10 years from now how much money can we borrow

Well if interest rates are let's say 10 well we can borrow 10 000 and afford the 1 000 a year payments but what if the bank came back to us and said we'll give you that same loan but we'll give it to you at one percent

How much would you like to borrow now well according to that same math we could never borrow a hundred thousand dollars and it would have the same impact from a cost perspective on an

Annual basis is this a smart loan for us to take out well it really depends on what we're doing with the money if we're a brand new company we're just getting started maybe a

Interesting situation would be amazon when they were first getting started or google any or any one of the major companies today that grew fairly quickly a lot of times big capital early on

Helps you grow point being is that with lower interest rates you're able to borrow more money with a less of a negative impact on the overall company now of course this could lead to bigger

Problems down the road when interest rates do begin to move higher well the companies that loaded up on debt today could end up in more trouble later so i'm not suggesting for

One second that you know oh it's okay because interest rates are low it's okay for companies to take a ton of debt but what i am suggesting is that we should analyze whenever we're analyzing a company we should analyze

What kind of debt they have how much interest what interest rates are they paying and how are they using the money that they're bringing in to affect the growth of their business

If it's done smartly borrowing money can be a very very smart move but if we're long-term investors and we're planning on holding a stock for let's say the next 30 years well i want to invest

In management companies that can use debt strategically but not recklessly because right now that debt could make sense at near zero or you know in the case of a

Aaa corporate bond maybe two or three percent that debt could make sense but what if that same debt went to five or six percent well now it might not make as much sense so i don't want

The companies that i would invest in to load up too much so despite the fact that the fed is going to leave interest rates fairly low we also know they're going to let inflation move higher

Well in my mind these are actually indications of making investing a smart move assets the stock market real estate tends to do fairly well with some inflation not too much

A little bit of inflation and it does fairly well when with low interest rates so if we've been sitting on the sidelines it might make sense to invest for the long run and to

Use what the fed is setting up for us to help all of us profit our own investment portfolios and if we're curious i actually did a video on how to analyze the data of a company

That hopefully helps you in your analysis of whatever company you're looking at if you're curious i got a link right here i got a link in the description below and i want to thank you so much for

Sticking with me all the way to the end of the video i really appreciate it thanks and i'll see in the next video

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