The Fed has just predicted a rather poor economy and the markets have noticed it

Comment

The Federal Reserve (Fed) announced on September 21 that it had raised interest rates by 75 basis points (bps), or three-quarters of a percentage point.

The decision came the day after the Federal Reserve Bank of Atlanta lowered its much-followed estimate of third quarter 2022 GDP (“GDP now”) to just 0.3% on September 20, after residential fixed investment disappointed, printing at -1.28%. , when the Atlanta Fed predicted it would print at + 0.3%. (Move the cursor over each bar here to see the interaction of the “PIL now” elements.)

(“GDP Now” Release Date Components for Q3 2022 GDP)

The 75 basis point interest rate hike was heavily priced by the market and most observers expected it. Some anticipated, and feared, an increase of 100 basis points, or 1%. However, the market responded negatively to the rate hike and the Dow Jones Industrials Average fell 1.7%. The benchmark S&P 500 index fell by the same percentage amount.

It appears that what troubled the market was the Fed’s disappointing so-called “dot plot”, formally the “Summary of Economic Projections”, also published on September 21, which was prepared by members of the Federal Open Market Committee, the policy of the Fed -do arm and their staff.

Dot plots are basically forecasts on the future direction of the economy at the end of the year in the current year and in the next three years and for the long term, analyzing gross domestic product (GDP), unemployment, inflation and interest rates.

Photo by Epoch Times
(Summary of Federal Reserve Projections)

Remarks

None of the projections are good. As seen in the rightmost series of columns, the range of GDP has gone from negative 0.3% in 2023 to 2.6% in 2024. What is called the “central trend”, where most estimates tend to be (the highest three and the lowest three are thrown out) – and the best estimate, in my view – showed GDP growth of no more than 2 percent.

I can’t help but think that the range of central trend estimates is also upbeat. I suspect inflation will have a longer tail than the 2023/2024 lows that the central trend would indicate. I expect a federal funds rate, the rate the Fed charges member banks, will have to be between 5 and 6% to reduce the inflation rate, especially if the strength of employment (which we attribute mainly to a low work participation rate) continues. (The 5-6% we think is necessary is the rate to keep inflation stable at the Fed’s preferred 2% rate; it is what Fed observers call the “terminal rate”.)

The other aspect of reducing inflation is the reduction in the Fed’s balance sheet. Although the Fed increased the Fed’s asset burn-off this month to $ 95 billion, we have long felt that this amount was insufficient. The assets, made up of Treasury and Mortgage Backed Securities (MBS), can be sold rather than “burned”. Fed Chairman Jerome Powell hasn’t ruled out the possibility, at least for MBS, but not right now, he said. The sale of MBS would reduce the liquidity balance in the economy, which creates some liquidity risk, but also reduces inflation.

One aspect of the continued rate hikes will be that the US dollar will continue to dominate the currency markets. For multinationals, this will cause foreign earnings to decrease as earnings are translated. As we wrote earlier this week, companies like Federal Express will suffer from this kind of translation losses and margin pressures.

Let’s revise our GDP estimate for this quarter to -0.5%.

__________________________
Clarifications: The views expressed, including the outcome of future events, are the views of the company and its management only as of September 21, 2022 and will not be revised for events after this document has been sent to the editors of The Epoch Times for publication. . The statements contained herein do not represent and should not be construed as investment advice. You shouldn’t use this article for that purpose. This article includes forward-looking statements about future events that may or may not unfold, as the writer claims. Before making any investment decision, you should consult with your financial, corporate, legal, tax and investment advisors. We partner with Technometrica executives for major work in some elements of our business.

We have no shares, options or similar derivative positions in any of the companies mentioned and have no plans to open such positions within the next 72 hours. I wrote this article myself and express my views. I don’t get paid for it (other than The Epoch Times as a business columnist). I have no business relationship with any company whose shares are mentioned in this article.

JG Collins

To follow

JG Collins is CEO of Stuyvesant Square Consultancy, a New York-based strategic consulting, market research and consulting firm. His writings on economics, commerce, politics and public policy have appeared in Forbes, New York Post, Crain’s New York Business, The Hill, The American Conservative and other publications.

    .

Leave a Reply

%d bloggers like this: