---
title: 'The Fed JUST Issued a $1.5 TRILLION Dollar Warning'
source: 'https://youtube.com/watch?v=1i_QB1qGkMs'
video_id: '1i_QB1qGkMs'
date: 2026-09-22
duration_sec: 1003
channel: 'Meet Kevin'
---

# The Fed JUST Issued a $1.5 TRILLION Dollar Warning

> Source: [The Fed JUST Issued a $1.5 TRILLION Dollar Warning](https://youtube.com/watch?v=1i_QB1qGkMs)

## Summary

The video analyzes Morgan Stanley's warning of a $1.5 trillion Federal Reserve balance sheet reduction starting in Q1 2027, which could suck $62 billion out of the market monthly. It also discusses rate hike expectations, labor market strength, and geopolitical risks, concluding that while headwinds exist, the near-term outlook remains bullish.

### Key Points

- **The $1.5 Trillion 'Suckening'** [00:19] — Morgan Stanley warns of a $1.5 trillion balance sheet reduction starting Q1 2027, lasting ~2 years, equating to $62 billion monthly market outflow.
- **Passive Runoff and Higher Yields** [01:35] — The reduction is expected to be a passive runoff, letting treasuries roll over, which could lead to higher yields and increased financing costs for AI infrastructure.
- **Rate Hike Expectations** [02:24] — Markets price in four rate hikes: Dec 9th, Mar 17th, June 9th, with the second hike at 100% certainty.
- **Host's Rate Hike View** [04:59] — The host prices in only two hikes, aligning with Morgan Stanley, and sees the difference as a potential bullish catalyst.
- **Strong ADP Data** [05:40] — ADP data came in at $20,000 vs $16,250 expected, indicating a strong labor market with ~80,000 jobs per month.
- **October Hike Coin Toss** [07:09] — Betting markets show a ~52% chance of a hike in October, a coin toss.
- **Rate Cut Probability** [08:01] — The host estimates a 1% chance of a rate cut before 2027, requiring a perfect geopolitical and labor scenario.
- **1990s Analogy** [09:09] — Barkin compares the current situation to the mid-1990s mid-cycle adjustment, suggesting the hiking cycle won't kill the economy.
- **Fed Officials' Inflation Warnings** [13:12] — Fed officials like Goolsbee and Collins warn that inflation remains above target and repeated shocks cannot be ignored.
- **2027 Headwinds** [15:56] — The host becomes more nervous going into 2027 due to the combined impact of rate hikes and the balance sheet reduction.

### Conclusion

The video provides a comprehensive analysis of the Fed's upcoming balance sheet reduction and its potential impact on markets, emphasizing the need to watch labor data and geopolitical developments.

## Transcript

Well, as Morgan Stanley warns, there's a $1.5 trillion set of sucketing coming, and it's coming soon. It was actually warned by the Federal Reserve in 2022 as a setup for reducing the Fed's balance sheet even more than we've already seen.
But the real $1.5 trillion reduction might still be ahead of us. Take a look at this. Morgan Stanley notes that the $1.5 trillion of balance sheet reduction is set to begin as early as Q1 2027 and could take roughly two years.
So if you divide that out by 24 months, that would work out to a $62 billion suck out of the market every single month. Remember, SpaceX took $100 billion out of the market.
it. In every two months, you would have more than a SpaceX level of suckening because of a decision by the Federal Reserve potentially starting in the first quarter of 2027. Now, right now, we have Mr. Warsh, who has his task forces working on the balance sheet.
One of those task forces is specifically focused on this $1.5 trillion of suck. The problem with this is, in December, we're expecting to hear from these task forces that got assigned
in June of 2026, and how they're going to plan this $1.5 trillion reduction. Morgan Stanley believes that we're probably going to see what they call a passive runoff that will end up delivering most of this reduction.
This is basically just letting treasuries roll over, but it means that the Federal Reserve isn't buying back those two, five, ten-year treasuries. And so that could lead to higher yields in 2027, which leads to higher financing costs
for that AI infrastructure build-out. This is definitely the opposite of quantitative easing. This is a form of tightening. And at the same time, as markets are betting on more rate hikes, it is another headwind for the market in 2027.
Now, I'm so optimistic and bullish, but I'm also realistic that some of these things are going to create headwinds. Let's look at the current odds that we have. First, we've got expectations that we will get our first rate hike before December 9th,
following the hike we just saw. So technically, it'll be our second rate hike. So let's just add it cumulatively. Our second rate hike is expected to hit with 100% certainty, as the current bottom market pricing, by December 9th.
So that kind of leaves the October hike a little bit of a coin toss, and we'll look at some of the betting markets in a moment on this. The second rate hike is priced in at March 17th of 27,
which could align with that $1.5 trillion of stocking from the Fed. And the third rate hike, actually fourth rate hike, again, I've got to add that cumulative one in, the third future rate hike, or fourth total rate hike in this cycle from Warsh,
could hit by June 9th. So that would basically leave us September 16th, 1, December 9th, 2, March 17th, 3, and the 4th by June 9th. That's the current market pricing.
Now, I think they're pricing in too much, and so does Morgan Stanley, but this is on top of the $1.5 trillion to suck, or, again, $62.5 billion per month
that's coming starting in 2027 so they can, as Warsh has said, reduce the size of the Federal Reserve's balance sheet. Right here, Morgan Stanley notes, and they just noted this a few days ago, they noted this on the 20th,
which was Sunday, they said, looking forward, the question is, does the September hike mark the beginning of a regime shift or a correction within the current framework? Inflation is moving in the right direction. They just want to achieve the pace faster, argues Morgan Stanley.
So Morgan Stanley, despite all this oil shock that we've seen, they're arguing, oh, we're going in the right direction. To be fair I mean if you take like six and 12 month trends yeah you could argue we going in the right direction But if you take like three month trends we starting to take up again And certainly if you annualize that one trend where you see super core pop off even if you take out some of the really hot super core items
like when we had cellular service in the last one, you still have a four-month high on super core even without that pop. And if you include that pop in, man, you're at, like, 6% super core inflation, which is nuts. But obviously there's a lot of volatility
on the month-over-month, and this is why even Kevin Warsh tells us, hey, like, we're looking at a broader basket. And when we look at a broader basket, 50% of the components we're looking at are still growing at more than a 3% year-over-year trend.
That's too fast. And so Morgan Stanley says they want to speed up our path to 2%. It's also a nice way for Warsh to put on the pants and prove that his pants are on. And Morgan Stanley says more hiking is likely, but perhaps less than what markets are pricing.
Again, I price in two. That aligns with Morgan Stanley here. Markets have four. I'm at two. I think the difference is bullish, because as the market realizes that difference, the market could actually be excited about rate cuts, as long as the AI canary is still singing, which so far, the labor market is still singing, the AI canary is still singing, everything's good, we do just have headwinds coming that we want to be aware of so we can pay attention to the health of the canaries.
It's kind of like, oh, there's a gust of air coming through the mine. How full of carbon monoxide is it? Look at the canary. Today's canary, for example, on ADP was fantastic. and I give full credit to the labor market for, at the very least, not laying off more people yet.
We talked about this a bit this morning in the course on the live stream, but just to focus on ADP, yes, you know, the labor market itself, if you're out there getting a job, looks frustratingly challenging, but ADP was expected to come in at $16.25 per week, mind you,
and it actually just came in at $20,000, which is fantastic. You know, that works out to a little over, because times four is obviously 28 days, that works out to a little over 80,000 jobs per month.
That's pretty good. That's a good pace, especially post-Trump's immigration stuff. And we were expecting 1625. We beat that by somewhere around 20%, which is good. We want this trajectory to continue. Will it continue forever? No, of course.
The market can roll over one day, but that one day is not now. And so far, it looks like we are accelerating post the slowdown that we had around June, July. We had a little bit of a slowdown post Q1.
And we are now accelerating out of that slowdown already, which is great. We got down to like 8,000 jobs there per week for a moment. And it was like, oh, no, are we going to go through zero? So far, no. So far, so good. So I agree with Morgan's family here that we'll probably end up getting fewer rate hikes.
If you look at the betting markets, Calchi. If you jump in over here, you've got Fed decision for October is indicating nearly a coin toss. We're at about 52% chance on hikes and a 49% chance there of maintaining.
Obviously, a little bit of a spread there for the market. If we jump into, I honestly think it's surprising that there's a note here that will the Fed cut rates before 2027. This is probably, I think the reason they're doing this is because I think the moneymaker play here is if they do cut to 427, the payout's insane because you only have 4.9% basically betting yes on this.
I think the upside here is that you get some kind of really low inflation rate. You get a deal with Iran. Heck, imagine you get a deal with Iran and you get a deal with Russia, Ukraine. oil prices plummet down to say
60 bucks, 50 bucks or whatever then you get the labor market rolls over for whatever reason ADP starts coming in on a weekly basis at negative at the same time as those things happen
yeah, you could actually get a rate cut before 27, let me just say I think that's probably closer to a 1% chance so that, I don't find super juicy right now to bet on
a lot would have to go perfect on geopolitical and poorly on labor which to me suggests even 5 is way too high right now This is especially true with what Barkin at the Federal Reserve just said Now I going to show
you what Barkin just said. Quick note, reinvest. My startup, we just partnered with Calchi. So, you're going to see mentions of Calchi, and if you use our link, not only does reinvest get dollars,
but you get dollars. If you use our link, you get $25 when you make your first trade, which It's kind of cool because it's kind of useful to see what markets are thinking, and I kind of enjoy it. The first time I got exposed to prediction markets was back in 2021 when I ran for governor.
It was kind of neat to see how prediction markets would move after a debate, for example. So I'm excited, especially with election season coming up. But let's talk about Barkin for a moment. So Barkin just came out, and you can see this on the Meet Kevin app under the Wire feed.
But Barking just came out to mention that he thinks that this is like a 1990s mid-cycle adjustment. It's actually somewhat bullish because he's suggesting that we're not really close to the end,
which in fairness has been, has overall been my base case. I know there are a lot of uncertainties and there are reasons to be bearish about, you know, oh, hardware's going to roll off a cliff, oh, software is dead, oh, don't buy anything.
There's a debt crisis, right? Like, I get it. There's fear across the board. But this mid-1990s argument is very interesting because in the mid-90s, the Fed doubled rates from 3 to, like, 3.5.
And then they took a little break and they finished the doubling to 6%. So they went from 3 to 6%. But then they're like, oh, we actually heightened too much. So then they ended up cutting. They still ended up getting the software ending in the mid-90s.
then we ended up going into the dot-com bubble. So, like, the hiking cycle didn't really kill the economy. It was really a mid-cycle adjustment. But to me, you know, making a bet on Calci right now that, you know,
you think they're going to cut in 2027, I don't know. I don't see that as a 5% shot unless something goes really wrong. Anything's possible, I suppose. Barkin does say that you can't rely on market interest rates to do the work on equations.
This I also think is an interesting note, because it really undoes what Warsh implied in July, which I think, looking back, Warsh wishes he didn't say, but he's like, oh, and the market's already gone up in rates. It's doing nothing to work for us. He was the one who set that up, and then people are like, wait, what?
No, no, you guys got to do your job, too. You've got to put the pants on, sir. Why are you pants? Are you wearing pants? So anyway, that's where we got to that. so I think a rate cut is very unrealistic.
This idea, though, about the Fed hiking right before the election, that's all going to come down to the next CPI report. So would I try to make a bet right now on a 50-50 coin toss for a Fed decision in October?
No, I would just wait for the CPI reports and then see if I could pick up an arbitrage then, which you might be able to. Like, let's go look at the CPI report of the new state. I'm not really worried about the labor report, because we're getting the ADP weekly.
We just got our first read for September already. You're not going to get September from the BLS for another two weeks. We're already getting reads into September by looking at the private data, which I honestly, I trust more after the installation of a new head of the Bureau of Labor Statistics by Donald Trump.
I don't trust the data as much. It's got me jaded. But let's take a look at this. October 14th is about two weeks before the Fed meeting, which I believe is October 29th. So two weeks and a day-ish before the press conference.
That's when you're going to get the next CPI report. That, I think, is what you want to pay attention to. But honestly, the geopolitical developments probably matter more. I still maintain I think there's a good shot at getting a deal.
If we get an Iran deal, like I would already have, you know, my stuff set up, ready to go. And I wanted to bet, let's say I wanted to bet on this right here. on the betting market, Fed decision on October, at any sign that a deal is actually about to happen that when I would buy a hold on this the maintain level But you know you got to be fast on that So that very important That almost more important than CPI Because
see, we could actually get a deal in Iran, oil prices could plummet, CPI could come in hot in mid-October, but then you actually end up looking through that hot CPI report
released in October based on September, because the deal happens at the end of September, which I suspect a deal is likely within some form of short-term deal, I think is likely within that. We'll see. So that's my take on that. Now, if we look at what Fed speak
is right now, here's what Fed speak is right now. Goolsbee says that inflation was supposed to peace, but forecasters keep delaying the peace of inflation because of oil prices. And he says this is not a comfortable pattern.
That Q4 was supposed to be the peak of inflation, then it was supposed to be Q1-26-22, or Q2-26, then Q3-26, and we're still at a peak. And so we can't keep looking through this inflation issue.
Mind you, this is exactly what, before the Fed meeting, we talked about. We talked about how the Fed is releasing documents saying you cannot continue to look through the inflation problems. They gave us enough of a hint to make a very confident claim that they were going to hike.
Grant Cardone doesn't read. I don't think he could read if it hit him in the face. And so it's no surprise that he bragged about on Twitter how the Fed was going to hold rates, and I raised him a poinsettia.
But that's really a topic for a different video. What's more interesting is Google Key tells us that we need evidence that shocks are fading. But a long deal would be that evidence. We need a credible pass to 2%, which is hard to justify right now.
And he says the rate hike cycle is unlikely to be painless. That's a little bit of a run-flag, right? You've got Goofy coming out saying prepare for pain, basically. And you've got the suckening coming up.
So we really need this Iran deal. There are headwinds here. He says you just can't work through this anymore. You can't ignore repeated shocks, which is similar to what Collins says.
Fed Collins says that inflation is likely to remain above 2%. This hike will help, but there's more work to do. Kashkari says the labor market is quite strong. Therefore, we can focus on price stability. Johnson says for the Fed to be credible, we must raise rates.
Schmidt tells us that inflation on a range of goods and services is running too hot. Oil is not the only driver. And he says in regards to the... And then on top of that, obviously, we have the Fed suckening concern.
The Fed suckening concern, of course, is this idea that, uh-oh, we are now in Q1 going to get the task force coming out and saying, by the way, we're now basically going to suck money out of the economy like SpaceX did basically every six weeks.
The problem with that is when the Fed sucks money out by not buying those bonds, that liquidity that could otherwise go into stocks goes to offset bonds because then yields go higher
and some people buy them because people see the risk-free yield is so high. You are basically directly taking money out of the hardware trade starting in 2027. So in fairness, I start getting a little bit more nervous
going into 2027 when we put all of these taxes together. And that doesn't make me bearish now. I'm actually pretty bullish between now and the end of the year. Most of you can see we really can have these issues right now.
But I think it's good to just be transparent and clear and as forecasty as I could potentially be for that transparency. So with that, I have just one final thing to say for now.
Oh, man. Come on, Kevin. Just relax. Relax with the money. Oh, that's okay. Why not advertise these things each other here? I feel like nobody else knows about this. We'll try a little advertising and see how it goes. Congratulations, man.
You've done so much. People love you. People look up to you. Kevin Passer, finance analyst and YouTuber. Meet Kevin. Always great to get your take.