Business

The Fed Just Predicted a Fairly Lousy Economy–and the Markets Noticed

Commentary

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

The decision came a day after the Federal Reserve Bank of Atlanta lowered its much-watched GDP estimate for the third quarter of 2022 (“GDP Now”) to just 0.3 percent on Sept. 20, after fixed asset investments were slashed. disappointed, with a print of -1.28 percent, while the Atlanta Fed had expected it to print at +0.3 percent. (Hover the cursor over each bar here to see the interplay of the “BBP Now” elements.)

(“BBP Now” release date components for Q3 2022 GDP)

The 75 basis point rate hike was largely priced into the market, and most observers expected it. Some anticipated — and feared — a 100 basis point, or 1 percent increase. Nevertheless, the market reacted negatively to the rate hike and the Dow Jones Industrials Average fell 1.7 percent. The benchmark S&P 500 Index fell by the same percentage.

It appears that the market has been troubling the market over the disappointing so-called “dot plots,” formally the “Summary of Economic Projections,” also released Sept. 21, which were drafted by members of the Federal Open Market Committee, the Fed’s policy. . making arm, and their rods.

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The point charts are basically forecasts of the future direction of the economy at the end of the year in the current and three future years and for the longer term, analyzing gross domestic product (GDP), unemployment, inflation and interest rates.

Epoch Times Photo
(Summary of Federal Reserve Forecasts)

observations

None of the prognosis is good. As can be seen in the rightmost set of columns, the GDP range went from -0.3 percent in 2023 to 2.6 percent in 2024. What’s called the “central trend,” where most estimates tend to be (the three highest and the three lowest have been discarded) – and the best estimate, in my opinion – showed GDP growth of no more than 2 percent.

I can’t help but think that even the central trend range of estimates is optimistic. I suspect inflation will have a longer tail than the 2023/2024 declines that the central trend would indicate. I expect that a federal fund rate, the rate the Fed charges to member banks, will have to be between 5 and 6 percent to lower the inflation rate, especially if the employment (which we attribute primarily to a low employment rate) rate ) continues. (The 5-6 percent we deem necessary is the rate to keep inflation steady at the Fed’s preferred rate of 2 percent; it’s what Fed watchers call the “final rate.”)

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The other aspect of curbing inflation is shrinking the Fed’s balance sheet. Although the Fed has increased the “burn-off” of Fed assets to $95 billion this month, we have long felt that amount was insufficient. The assets – consisting of Treasury bills and mortgage-backed securities (MBS) – can be sold instead of ‘burnt down’. Fed Chair Jerome Powell didn’t rule out the possibility, at least not for MBS, but not at the moment, he said. Selling the MBS would reduce the balance of cash in the economy, which carries some liquidity risk, but also reduces inflation.

One aspect of the ongoing rate hikes will be that the US dollar will continue to dominate foreign exchange markets. For multinationals, this will lead to lower income from abroad, as the income is translated. As we wrote earlier this week, companies like Federal Express will experience this kind of translation loss and margin pressure.

We are revising our GDP estimate for this quarter to -0.5 percent.

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Revelation: The views expressed, including the outcome of future events, are the opinions of the company and its management only as of September 21, 2022, and will not be revised for events after this document is submitted to the editors of The Epoch Times for publication. Statements herein do not represent investment advice and should not be construed as investment advice. Do not use this article for that. This article contains forward-looking statements about future events that may or may not develop as the author believes. Before making any investment decision, you should consult your own investment, business, legal, tax and financial advisors. We partner with the directors of Technometrica for research work in some areas of our company.

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We have no equity, option or similar derivatives position in any of the listed companies and do not intend to initiate such positions within the next 72 hours. I wrote this article myself and it reflects my own opinion. I receive no compensation for it (except from The Epoch Times as a business columnist). I have no business relationship with any company whose stock is mentioned in this article.

JG Collins

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

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