---
title: 'What if the Fed does NOT Hike!??!?!'
source: 'https://youtube.com/watch?v=_1AMCGl_x-U'
video_id: '_1AMCGl_x-U'
date: 2026-09-14
duration_sec: 1110
channel: 'Meet Kevin'
---

# What if the Fed does NOT Hike!??!?!

> Source: [What if the Fed does NOT Hike!??!?!](https://youtube.com/watch?v=_1AMCGl_x-U)

## Summary

The video analyzes the implications of the 10-year Treasury yield breaking 5% and the upcoming Federal Reserve decision, arguing that the Fed must hike rates to maintain credibility and prevent market destabilization. It outlines multiple negative consequences of not hiking, including widening yield spreads, stagflation concerns, and banking sector stress.

### Key Points

- **10-Year Yield Breaks 5%** [00:00] — The 10-year Treasury yield broke 5% for the first time in 3 years, setting up a week of significant firsts including a potential rate hike and a major IPO.
- **Fed's 'Market Does It' Argument** [00:35] — The Fed may argue that rising yields already fight inflation, citing the 2-year yield up 1.2 percentage points to 4.68% from 3.5% at the start of the year, so no action is needed.
- **Kevin Warsh's Credibility Test** [01:17] — The upcoming Fed press conference will test whether Kevin Warsh will raise rates or be seen as a political appointee. His previous comments suggested the market is functioning fine and doing the signaling.
- **10-2 Spread Destabilization Risk** [02:47] — If the Fed doesn't hike, the 10-2 yield spread could widen rapidly, as seen before past recessions (1990, 2000, 2007, COVID). A spread over 0.5 indicates shock-prone territory; over 1.0 triggers recession alarms.
- **Term Premium and Credibility** [05:14] — Without a hike, the market demands higher term premium on long-term yields, while the 2-year yield may drop, widening the spread and signaling loss of Fed credibility on inflation.
- **Borrowing Costs and Inflation Solutions** [07:20] — Rising long-term yields increase borrowing costs for consumers and businesses. Three ways to solve inflation: kill tariffs (could reduce inflation by 2-3%), end the Iran war, or raise rates to establish credibility.
- **Stagflation and Equity Derating** [09:38] — Runaway inflation expectations lead to stagflation concerns, causing the stock market to derate. The entire economy is 'sitting on a toothpick of the stock market'.
- **Bank Capital Ratios and Klarna Example** [12:28] — Higher yields whack bank capital ratios as bond values fall. Example: Klarna has $2.6B cash vs $3.1B bills and $11.6B deposits, already upside down, showing how a black swan can destroy banking institutions.
- **Widening Credit Spreads** [15:20] — With the 10-year at 5%, corporate bonds need higher yields (7-8%) to compensate, widening credit spreads—an early recession warning. Free cash flow has plummeted, especially among hyperscalers.
- **Conclusion: Not Hiking is Bad** [16:46] — Not hiking would destroy credibility, worsen long-term yields, increase inflation expectations, derate equities, and risk bank losses. The speaker believes Warsh will hike, and markets will recover.

### Conclusion

The Fed must hike rates to preserve credibility and prevent a cascade of negative market effects, including widening spreads, stagflation, and banking stress. Not hiking would be counterproductive and risk a severe economic downturn.

## Transcript

It's official, the 10-year treasury yield just broke 5%, the first time in the last 3 years that we broke through 5%. We're going to hit a lot of firsts in 3 years, I think, this week, including not only this blowout IPO perspective from Anthropix,
but also the first rate hike that we've seen in 3 years. So a lot of firsts in 3 years, I suppose. But what we've got to answer is, what if the Federal Reserve says, hey, yields have already gone up.
I don't need to fight inflation. Just look at the two-year Treasury yield. It's already up. It's at 4.68%, which at the beginning of the year we were sitting at 3.5.
The two years gone up 1.2 percentage points. What does the Fed need to do? Why do anything? We could just sit, chill, and keep FedRace where they are.
And in this, we're going to break down why that might not work the way it would seem. So the reason where this idea comes from is in the last Federal Reserve Press Conference,
which we'll have another one of in two days to test whether Kevin Warsh actually has any balls to raise rates, or if he truly is a knee-bending shill as installed by Donald Trump.
This will be the pants test. Does he have balls? Is he wearing any pants? Or are there no balls to cover up? That'll be the test this week. But anyway, in his last presser, he did indicate,
hey, the market seems to be functioning fine. People are more worried about inflationary risks, and all of a sudden yields are going up. So the market's doing it. Why do I need to do anything? That's essentially what he implied in the last meeting.
And that's fine for inter-meeting signaling in terms of, hey, does he need to give forward guidance or not? Maybe not if the bond market's going to signal it for you.
And I think that's more of what he's arguing. Not that the bond market will do his work for him. He still has to adjust the discount rate. But rather the market will do his signaling for him.
Now, why would that be the case? Well, the easiest way to think about this is what happens if the Federal Reserve does not hike on Wednesday? And there are 11 different things that I took...
There are quite a few different things that can happen. We don't necessarily have to number all of them, but I'm going to go through some of the most important ones. Let's start with what happens to the 10-2 spread.
So first of all, if the Federal Reserve does not hike on Wednesday, this relatively stable spread that we've had, you know, sitting under that .5 range,
kind of bobbing around .2 to .4 in that range, this can destabilize. So if we look at this on a year-to-date basis, we can see we're actually relatively low. We had some fear over here at the beginning of the war.
But we've really come off of some of these concerns. When did we have these concerns? Why did this graph go up? This graph going up over 0.5 is when our shock risk increases.
So the shock that some kind of black swan takes the economy down, that increases when this graph goes up. At the end of the year, we were concerned the labor market was rolling over.
The data was suggesting the labor market was rapidly decaying through zero. That was not good. And so, not a surprise, the 10-2 yield curve spread went up. This is just the difference between the 2-year yield and the 10-year yield.
And if we look at it historically, we want it to be stable. We don't want rapid skyrockets in this line. Because if you look, you get rapid skyrockets in this line at the start of a recession.
1990, rapid skyrocket. 2000 to 2002, rapid skyrocket. Market really popped or peaked around early 2000.
We got our final rate hike from Alan Greenspan. His rate hike started in 1998, and they peaked out in about May of 2000. And his final rate hike has been associated with peaking out the market, the top of the bubble, so to speak.
So you get this giant spike starting in Q1 of 2000 You get this giant spike that starts over here in 2007 right before the Great Recession
And of course, you have the COVID one over here, which was a little bit more short term and not as wide as some of these. I'm giving all the money printing to bail us out of the COVID recession that happened. Oh, that dirty one month recession.
But anyway, you want this to be stable. So if you want the economy to hold up, you don't want the economy to roll over, you want this to be stable. If the Federal Reserve does not hike on Wednesday, what ends up happening is the market argues,
okay, you don't care about inflation anymore. You don't have any credibility when it comes to inflation. Therefore, we are going to demand more term premium,
or we're going to demand higher yields on the long end. So basically, the 10-year needs to go up even more.
The 2-year, which is right here, is going up because of expectations the Fed is going to raise rates, but it's actually possible because the 2-year is so closely associated with Fed policy rates
that if the Fed does not end up hiking on Wednesday, the two-year yield goes down. Because now it says, okay, the guy's actually not going to raise rates.
Okay, fine, I guess short-term rates are lower, but the guy just gave up all credibility possible on inflation, and so the longer term goes up. This means the 10 goes up, the 2 goes down.
What does that do? It widens the spread between these two numbers right here. Those little arrows right there, that's the spread. When you widen the spread, you make this chart skyrocket,
just like you have in other recessions. You don't want to do that. And there are more reasons for this. We're going to break those down. But that spread widens very, very quickly if they don't end up hiking on Wednesday.
If it spreads over 50, like 0.5, that's when we get into shock-prone territory. And once we get over 1, a stress rate that happens rapidly, so if we get over 1.0 on the spread,
that's usually when the recession alarm bells start going off. Why does that happen? Okay, a few reasons. When long-term rates go up, you're skyrocketing borrowing costs.
This is exactly what Scotty B is trying to control and he's failing at. He's trying to bring credit card rates down. He's trying to bring mortgage rates down. He's trying to keep this economy humming along,
but long-term yields keep going higher. The way to bring those long-term yields down is by solving the inflation problem. There are a few ways you can rapidly solve the inflation problem.
And I think Donald Trump would be very smart to implement some of these. But the three main ways we can solve inflation right now would be kill tariffs.
You would instantaneously have a reduction in inflation, probably of like 2 or 3%. Heck, we could instantly go negative if you just went back to free trade. And yes, I know that's where, you know, the chills for Donald Trump are usually like,
but Kevin, it wasn't fair before. Okay, fine. We have trade-weighted tariffs of 2.2% on other countries. Other countries have like, on average, 2.4% on us.
So yeah, it was slightly sacked against their favor. But I mean, we're talking about 2 to 2.4%. Now we have tariffs on other countries of an average of like 12%. So that's inflationary. you want inflation to go away real fast
why don't you stop shooting yourself in the foot Donnie T and the rates could actually come down man but that ain't gonna happen because I'd be too smart to do this you could end the Iran war
this I actually think will happen I think and I'm speculating on this but I think they're gonna have some kind of Middle East coalition that kind of takes over that regime and they allow Donald Trump a clean exit
where they sort of like the Saudis and Oman and Bahrain and Kuwait are just like hey we take it over Trump Don like let us figure it out Just like please F off And then Donald Trump can sort of declare victory It all open again We won with Trump That would be great for reducing inflation but that could be a pipe dream too
So these things could reduce inflation. Alternatively, you need to raise rates because you have to establish credibility. You have to prevent inflation expectations from running away. Because if inflation expectations run away, you get stagflation.
Okay. What else happens if you don't end up raising rates on Wednesday? So, first, credibility. Second, term premium. So, long-term yields go up. That hurts what Trump, Essendon, and Trump want, right?
You get potentially runaway inflation expectations, which means you get stagflation concerns. Okay, as soon as you get stagflation concerns, that's when the stock market starts derating.
That's worst-case scenario. our entire economy, in my opinion, is sitting on a toothpick of the stock market. If this stock market, and it's like, you know, sometimes people leave me these comments,
and they're like, oh, Kevin, you just want the stock market to go up so it can make you money. And I'm like, okay, guys, we would benefit way more from rates going to zero
and from poop hitting the fan because it would be great for real estate. I don't want that to happen. It's going to happen one day. The stock market going up, smaller part of the picture.
At least from our point of view. The reason I say it's on the toothpick, though, is because if something knocks the stock market over, whatever it is, saturation concerns, the Fed being stupid,
like not building credibility, saturation concerns, whatever it is, whatever blows the stock market over, If the stock market rolls over, you know, the people who are like, God, just serve those suits right.
The entire global economy is going to absolute FH90. It will be so bad. You do not want the stock market to roll over. As soon as the stock market rolls over,
all the circular spending that is keeping this party going and keeping the lights on stops. And the layoffs will be glorious in the worst way possible. and then you have weaned-aiding Kevin Warsh,
who's sitting at the Federal Reserve, who is not going to print money to save your AFF. So you will have them reduce rates to zero, which helps the rich people, but you will not have them bailing everyone out,
and it will be really hard to get Kevin Warsh to expand the balance sheet, especially if you have a split and divided Congress. Good luck passing any kind of stimulus or $5,000 stimulus checks, right? Good luck.
So it's really, really bad. So this is where the Fed not raising rates can actually destroy the equity rally. Okay, but we're not done yet. So credibility.
Recapping, right? Just to catch you back up to speed. Credibility gets shot in the foot if they don't raise rates. Term premium on the long end goes up. That hurts financing for AI for consumers otherwise. Stagflation concerns derate U.S. equities.
Okay? It's not just that. the more these yields go up, the more bank capital ratios get whacked because the bonds that they hold look like they've lost even more money.
Basically, bondholders lose even more money, and then the banks are like, bro, we are getting smoked here. When banks start getting smoked, they can't lend out as much money. Okay, I, listen, in the court, okay, I usually don't do this,
but in the court number live stream this morning, we looked at a account, I'm just going to give you an example of smoked, okay? We looked at this company that has, it's called Klarna. You've probably heard of it before, okay?
It's buy now, pay later for them. They have about $2.6 billion in cash. I just want to show you screwed, okay? They are a Swedish, they have a Swedish banking license.
They're applying for a U.S. banking license. Let me just show you screwed in a situation where the Fed does not hike rates, They have $2.6 billion in cash. They have $3.1 billion in bills.
They do not have enough cash to pay their bills right now. But let me tell you something else. They hold $11.6 billion in deposits, like banking deposits.
If every one of those people wanted their money right now if everyone who held that billion wanted their money right now Karnat is nowhere close to having it They are already upside down in the amount of bills that they have to pay
compared to the amount of cash they have. So they're literally already upside down, and you don't have any form of a bank run. So you're already upside down. This is an $8 billion market cap company
that has $11.6 billion of deposits on hand. And the average length that these deposits are expected to stay at the bank before unlocking would be about nine months.
So you could unlock a substantial amount of deposits really rapidly. That's an example of how a black swan starts destroying banking institutions.
You get the BNPLs that roll over because the equity market's rolling over. Credit spreads are widening. All of this pyramid rolls over.
And it all collapses. And it's really bad. And it's literally right here in our face. I'm showing you the literal financials from June 30th, 2026 for Klarna.
Showing you that they are blatantly upside down. And everything is fine right now. But that doesn't mean it will be fine forever.
Okay, widening spreads is the next one. So what are widening spreads? Widening spreads are basically where if the 10-year treasury is at 5%, which it is. So let's grab an orange marker here, okay?
If the 10-year is at 5%, why am I going to go buy a Google bond at 6%? I'm going to go to Google and go, Google, I need 7% or I need 8% or whatever to compensate me
because I could get the quote-unquote risk-free yield of 5% now in U.S. Treasury. So this has a risk of widening credit spreads, which is also sort of an early warning sign of recession.
People getting fearful that corporations won't be able to sustain the yields that they have to pay to raise debt. And we already know free cash flow has plummeted, and all the MAG7s basically are expected to be negative free cash flow,
at least the big hyperscalers, you know, the Meta, Microsoft, Google, Oracle, whatever. That's not great. And then on top of that, which I think we've pretty much already covered,
you've got the spike in costs that that also sends to consumers. So when you put all of those factors together, they all get, ironically, worse if the Fed does not hike.
So I think when Walsh says, oh, the market's already adjusted, I think it's a way of saying the market's already given you forward guidance. But credibility goes in the toilet if he doesn't hike. That's bad.
Long-term yields get worse. That's bad for the AI rally. That's bad for the consumer. Inflation expectations substantially worsen because people look at this guy as a clown and a shill and a political hack.
And this guy's career basically gets shot. The amount of blast that this guy is going to get if he doesn't hike rates is going to be insane. He has to. If he doesn't, it's going to be crazy.
But he has to. then he's got the equity derating risk because of the lack of credibility and inflation risk in my opinion if he does not hike
on Wednesday it's actually bad for the stock market but I think he will and markets get over it and this whole like AI drama that we got this weekend won't be a big deal at all and it'll
have been seen as buying the big box but we still got that peak here you know we had a CPI last week we had a Fed meeting on Wednesday to get a seat, if you're going to put the pants on or not. Then you have the risk of losses at banks,
the widening spreads, and then, you know, we've already touched on that, the biking and pooling stuff. So, not hiking, basically, would be retarded.
I hope that's clear enough. I'm not advertising. These things that you told us here, I feel like nobody else knows about this. We'll try a little advertising and see how it goes. Congratulations, man. You have done so much. People love you. People look up to you.
Kevin Parker, F.I. National Analyst, and YouTuber. Meet Kevin. Always great to get your take.