BREAKING: The FED Cancels ALL Rate Cuts - Market Selloff Has Begun!
In a Nutshell
The Fed has reversed course with new Chair Kevin Walsh signaling potential rate hikes in 2026 amid 4.2% inflation driven by energy prices, while the S&P 500 trades at a 40x PE ratio near dotcom bubble levels. Bitcoin has crashed 40% from its peak with Strategy's selling potentially creating a death spiral, and housing markets show price divergence with Sun Belt declines versus Midwest gains. Long-term regular investing remains the recommended approach despite these warning signals.
These notes were generated by AI and may contain inaccuracies.
As of a few hours ago, the Federal Reserve completely flipped their outlook for the economy, inflation, and interest rates. Kevin Walsh has officially replaced Jerome Powell as head of the Federal Reserve. The market is reacting because the Fed is now planning to increase interest rates sometime in 2026 during what's being called the most overvalued market in history.
Even though rising prices were trending downward over the last few months, inflation has returned to a 3-year high with CPI coming in at 4.2%. Almost all of the inflation comes from energy prices, which have nearly doubled in the last 6 months due to Middle East conflicts.
The Producer Price Index (PPI) measures what businesses pay before passing costs to consumers. The most recent numbers came in worse than expected. This puts the Federal Reserve in a difficult position: if inflation doesn't come down, they may need to raise interest rates. However, if oil prices fall, they will need to wait several months before making their next move, as any deal could collapse and send oil prices back up.
The stock market has been highly eventful, highlighted by the largest IPO in history from SpaceX. An analysis of all tech IPOs over a billion dollars since 2010 showed average returns of 248% over 5 years. However, this average is heavily skewed by outliers like Shopify and Palanteer, which increased by thousands of percent. When excluding those winners, the median tech IPO is down 7.4% six months after its first trading day and still down 3.5% a full year later.
SpaceX is already trading at over a $2 trillion valuation, making 30x returns from current levels extremely unlikely. Unlike Shopify and Palanteer, which IPOed small and grew into hundred-billion-dollar companies, SpaceX is starting from an already massive valuation. Existing shareholders are expected to begin offloading shares over the next 6 months.
Some view the record-breaking SpaceX IPO as a potential market top signal during an AI bubble, with private investors cashing out before a crash. Historical data shows bursts of giant money-losing IPOs often cluster near market peaks. The S&P 500's PE ratio now sits near 40, a level only touched once before during the dotcom bubble. Bank of America warns the S&P 500 is overvalued on 17 of 20 valuation metrics, with eight exceeding 2000 peak levels.
Despite these warning signs, Bank of America's same checklist hit 70% back in February 2025 when the S&P 500 was around 61.44, and investors who panic sold then missed another 20% increase. AI activity continues skyrocketing, with Google reporting cloud revenue would have been higher if they could meet demand.
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The housing market has shifted substantially. Last year, multiple offers over asking came quickly and easily. The current property received multiple offers over asking, but not as strong as expected. Mortgage rates have increased and the buyer pool is thinning. Sellers are pulling homes off the market at a near-record pace, often because they already have record-low interest rates and believe their homes are still worth 2021 prices.
Zillow believes the housing market recovery is on pause, with typical homes up only 0.8% year-over-year. Prices are expected to fall in Austin, New Orleans, Denver, the Sun Belt, and much of California. Prices are expected to rise in more affordable Midwest areas including Rockford, Illinois; Rochester, Wisconsin; and Saratoga Springs, New York, which are attracting younger first-time buyers.
Higher interest rates make sellers more likely to pull homes off the market. With fewer homes available, remaining homes sell for higher prices. This creates a paradox where housing prices should be falling but are not. Advice for buyers: don't be afraid to walk away, submit aggressive offers, and shop around loans for the lowest interest rate. Advice for sellers: price aggressively upfront, as longer time on market reduces leverage and buyers assume something is wrong with the property.
Bitcoin is down almost 40% from its all-time high of $124,000 and fell another 20% in the last month to its lowest point in over a year. Michael Saylor's company Strategy is the largest corporate holder of Bitcoin with slightly more than 4% of the entire supply. On June 1st, the company disclosed selling 32 Bitcoin, triggering market selloff. Strategy buys Bitcoin by issuing shares and pays a 12% dividend yield. If Bitcoin falls, they may need to issue more shares, diluting shareholders, or sell Bitcoin to cover costs, potentially creating a death spiral.
Michael Saylor claims that if Bitcoin appreciates by just 2% per year on average, the company can cover all preferred dividends indefinitely without issuing more common shares. He purchased more Bitcoin after the price fell. Galaxy Research believes Bitcoin may not have bottomed yet, with a base case of $40,000 to $46,000 by late this year, though they still predict $250,000 by end of 2027. Standard Chartered believes the Bitcoin bottom is already in at $59,000.
Kevin Walsh gave his first speech as Federal Reserve Chair and reiterated commitment to fighting inflation while protecting the economy. Right before the meeting, a peace agreement was tentatively reached with Iran, giving the Fed room to eventually cut rates again. The market is confirming no rate cuts are likely anytime soon, with potential rate hikes indicated for this year and interest rates expected to remain elevated.
The summary of economic projections shows interest rates expected to increase slightly in 2026 before falling in 2027 and 2028. Inflation is expected to remain elevated at 3.6% throughout 2026 before falling. Kevin Walsh wants to eliminate the dot plot, meaning the Fed would signal less and do more, providing zero guidance about future moves.
Kevin Walsh cannot unilaterally lower interest rates without convincing the entire Federal Reserve to vote with him. Jerome Powell remains on the board, making substantial changes unlikely until Powell steps away. Rumors suggest that as Trump's pick, Walsh may attempt internally to make far-reaching changes at the Fed.
The current situation involves 4.2% inflation, a war-driven oil shock, a divided Fed, and a bond market in shambles. The peace deal outcome over the next month will determine whether rate cuts become possible again or if inflation rises further. The situation remains cautiously optimistic but hedged. Recent events include the largest IPO in history, hottest inflation in three years, a peace deal with Iran, and Bitcoin cut in half before markets moved higher. The consistent strategy is buying regularly and consistently over the long term.
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