Latest / The Bear Market Podcast with Fexingo: Surviving Downturns, Buying the Dip, and Long-Term Resilience / How Neel Kashkari Just Changed Rate Hike Expectations
Transcript
- Lucas: Minneapolis Fed President Neel Kashkari said on Friday — and I want to be precise here — he said he 'expects a rate hike this year.' Not 'sees the possibility.' Not 'wouldn't rule it out.' He said expects. Luna: That's a pretty sharp shift from the soft-landing narrative we've been hearing most of this year. Lucas: Right. And the market reaction tells you traders took it seriously. The S&P 500 is down 1.6 percent over the past five days, the Nasdaq has dropped 3.3 percent. The VIX is at 18.41, up 6.5 percent in the same window. Luna: So we're not talking about panic — but there is a real repricing happening. Lucas: Exactly. The VIX at 18 is elevated but not crisis-level. It says: the market is adjusting expectations, not bracing for a crash. But what I find most interesting is the bond market's reaction. Luna: I saw the two-year yield is at 4.09 percent — down a couple basis points from last week. That's actually moving in the opposite direction you'd expect if a hike were coming. Lucas: That's the puzzle. The two-year yield, which is the most sensitive to Fed policy expectations, ticked down. The ten-year is at 4.40 percent. The spread between them is 31 basis points — still positive, still an upward-sloping curve. Luna: So bond traders are saying: Kashkari said it, but we don't think the FOMC as a whole will follow through. Or they think a hike would be small and short-lived. Lucas: I think it's a mix of both. Kashkari is one of the more hawkish members, but he's not a voting member this year. Still, he's a former Treasury official, and when he speaks, markets listen. The key question is whether his view reflects a broader shift inside the Fed. Luna: Let's look at the economic data that might be driving his thinking. Real GDP growth came in at 2.1 percent annualised for the first quarter — that's up from 0.5 percent in the prior quarter. Lucas: That's a significant acceleration. Nominal GDP is above $31.8 trillion. The economy is not weak. And if you're Kashkari, you look at that and think: we're not done tightening. Luna: But inflation data has been coming down. The CPI has moderated. The Fed's preferred PCE measure is trending toward 2.5 percent. Lucas: True, but here's the nuance: Kashkari has been consistently worried about services inflation, especially housing. And he's pointed to the fact that the economy is still generating jobs at a solid pace. The JOLTS data, while a bit old now, showed 8.1 million openings in April. Luna: So his argument is: the economy can handle another hike, and we need to make sure inflation doesn't get stuck at 3 percent. Lucas: That's exactly it. He's said in the past that he'd rather err on the side of doing too much than too little. And Friday's comment is consistent with that. Luna: Now, how should an investor think about this? If the Fed actually hikes, say, 25 basis points later this year, what does that mean for different parts of the market? Lucas: Let's break it down by asset class. Equities: a hike would be negative for growth stocks with high valuations. The Nasdaq has already been selling off — down 3.3 percent in five days. If Kashkari's view gains traction, you could see further rotation into value and defensive sectors. Luna: We saw a bit of that this week. The Dow is actually up 0.3 percent over the same period, while the Nasdaq dropped. That's a textbook defensive rotation. Lucas: Exactly. The Russell 2000 is also up 0.2 percent. Small caps tend to be more sensitive to domestic economic strength, and if the economy is strong enough to warrant a hike, they might hold up better. Luna: What about bonds? If a hike comes, short-term yields rise, but long-term yields might not move much if the market thinks the hike will slow growth later. Lucas: That's the classic bull-steepener scenario. The two-year goes up, the ten-year stays flat or even declines, and the yield curve steepens. We've already seen some of that — the spread has widened from near zero earlier this year to 31 basis points now. Luna: So for bond investors, it might be a good time to be in short duration, or to position for a steeper curve. Lucas: I think so. Floating-rate notes, short-term Treasuries. One other interesting angle: the VIX at 18.41 and the VVIX at 89. The VVIX, which measures volatility of volatility, is actually down 2.9 percent this week. That suggests options traders aren't panicking about tail risk. They see this as a manageable repricing, not a crisis. Luna: So the consensus seems to be: Kashkari's comment is notable, but not a game-changer unless other FOMC members echo it. Lucas: Right. And that's the watch point. The next FOMC meeting is at the end of July. Between now and then, we get the June CPI report, the jobs report for June. If those come in hot, Kashkari starts to sound less like an outlier. Luna: Speaking of making sense of all this, if today's conversation helped you think about your portfolio a little differently, that's really what we're here for. This show is completely ad-free, and listener support is the only reason that's possible. Lucas: Yeah, it's a small thing but it makes a big difference to us. If today was worth a coffee to you, you can find us at buy me a coffee dot com slash fexingo. That's it — no pressure, just a simple way to keep the conversation going. Luna: And we really appreciate it. Now, back to the data — one thing I want to flag is the headline about SpaceX joining the Nasdaq-100. That's going to drive massive ETF buying demand. Lucas: Yeah, that's a huge story. SpaceX is one of the most anticipated additions. But it also raises a question: in an environment where a Fed official is talking about rate hikes, does that change the calculus for a high-growth name like SpaceX? Luna: I think it depends on the timeline. The index inclusion is fast-tracked, so there will be forced buying from ETFs regardless of macro. But the long-term valuation narrative could be affected if rates stay higher for longer. Lucas: That's a good point. And it ties back to what we were saying about the Nasdaq selloff. Even if SpaceX gets a short-term boost from index funds, the broader growth-stock universe is under pressure from exactly the kind of rate-hike talk Kashkari is putting on the table. Luna: So the bottom line for investors: don't ignore a single Fed official's comment, but don't overreact either. Watch the data, watch the yield curve, and position for a range of outcomes. Lucas: Exactly. And that's what makes this moment interesting. The market is pricing in a low probability of a hike, but the risk is real. For anyone who's been all-in on growth, it might be worth trimming some exposure or hedging with volatility products. Luna: Or just keeping some cash ready to deploy if the selloff gets more severe. Lucas: Cash is always an option. But the key takeaway from Kashkari's comments is that the soft landing isn't guaranteed. The Fed's work may not be done. And markets are just starting to adjust to that possibility. Luna: We'll be watching the data closely. Thanks for joining us on The Bear Market Podcast. Lucas: And as always, if today was worth a coffee to you, you know where to find us. We'll be back tomorrow with another episode.