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

By J.G. Collins

Commentary

The Federal Reserve (Fed) announced on Sept. 21 that it raised 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 dropped its much-watched estimate of third-quarter 2022 GDP (“GDP Now“) to just 0.3 percent on Sept. 20, after residential fixed investment disappointed, printing at -1.28 percent, when the Atlanta Fed had anticipated it to print at +0.3 percent. (Move the cursor over each bar, here, to see the interplay of the “GDP Now” elements.)

(“GDP Now” release date components for third-quarter 2022 GDP)

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

It appears that what troubled the market was the Fed’s  disappointing so-called “dot plots,” formally the “Summary of Economic Projections,” also released on Sept. 21, which is prepared by members of the Federal Open Market Committee, the Fed’s policy-making arm, and their staffs.

The dot plots are basically prognostications as to the future direction of the economy at year-end in the current and three future years and for the longer term, analyzing gross domestic product (GDP), unemployment, inflation, and interest rates.

(Summary of Federal Reserve projections)

Obeservations

None of the projections are good. As seen in the rightmost set of columns, the range of GDP went from negative 0.3 percent in 2023 to 2.6 percent 2024. What’s called the “central tendency,” where most of the estimates tend to be (the three highest and the three lowest are thrown out)—and the best estimate, in my view—showed GDP growth of no more than 2 percent.

I cannot help but think that even the central tendency range of estimates are sanguine. I suspect that inflation will have a longer tail than the 2023/2024 declines that the central tendency would indicate. I expect that a federal funds rate, the rate the Fed charges member banks, will need to be in the range of 5–6 percent to ramp down the rate of inflation, especially if job strength (which we attribute mostly to a low labor participation rate) continues.  (The 5–6 percent we think necessary is the rate to keep  inflation stable at the Fed’s preferred 2 percent rate; it’s what Fed watchers call the “terminal rate.”)

The other aspect of bringing down inflation is reducing the Fed’s balance sheet. While 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—comprised of Treasuries and mortgage-backed securities (MBS)—can be sold instead of “burned off.” Fed Chair Jerome Powell did not rule out the possibility, at least for MBS, but not at this time, he said. Selling off the MBS would reduce the balance of cash in the economy, which creates some liquidity risk, but also reduces inflation.

One aspect of the continuing rate hikes will be that the U.S. dollar will continue to dominate the currency markets. For multinationals, that will cause reduced earnings from overseas as the earnings are translated. As we wrote earlier this week, companies like Federal Express will suffer these kinds of translation losses as well as margin pressure.

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

Affiliate News Feeds

  • Washington Examiner
  • The Federalist
  • The Epoch Times
  • The Guardian
  • The Gateway Pundit

In the anti-gun political climate of California, residents are stepping up their quest to own weapons and learn how to use them. [...]

Sen. Rand Paul (R-KY) teamed up with former University of Kentucky swimmer Riley Gaines in a new campaign ad taking aim at transgender athletes competing in women’s sports. [...]

For the left, labeling Republicans as 'extremists' is a long-term goal configured to chase serious conservatives out of government. [...]

In classic Big Tech information suppression form, Google-owned YouTube punished a journalist on Thursday for highlighting just how many Democrats, corporate media outlets, and celebrities denied that former President Donald… [...]

Since being named special counsel in October 2020, John Durham has investigated or indicted several unscrupulous anti-Trump informants. But he has spared the FBI agents who handled them, raising suspicions… [...]

Hurricane Ian could turn out to be the deadliest hurricane to strike Florida, according to President Joe Biden. “This could be the deadliest hurricane in Florida’s history. The numbers …… [...]

Exclusive: in unusual move, PM and Kwasi Kwarteng will meet fiscal watchdog after mini-budget sparked investor panicKwasi Kwarteng’s mini-budget: key points at a glanceAll UK political developments liveLiz Truss will… [...]

Bank of England stepped in on Thursday to stabilise price of UK governments bonds and avert a deeper crisisPension fund managers breathed a cautious sigh of relief on Thursday morning.… [...]

A shocking video shows a mother in Quincy, Massachusetts, holding down a 12-year-old girl so that her daughter could attack her. The mother, who is black, can be heard in… [...]

A country cannot survive this insanity. A Planned Parenthood doctor and Democrat witness on Thursday told Congress that men can get pregnant. How did this so-called doctor graduate from high… [...]

NH Politician

NH POLITICIAN is owned and operated by USNN World News Corporation, a New Hampshire based media company specializing in the collection, publication and distribution of public opinion information, local,...