The Fed just predicted a pretty bad economy — and the markets took notice
The Federal Reserve (Fed) announced on September 21 that it raised interest rates by 75 basis points, or three-quarters of a percentage point.
The decision came a day after the Atlanta Federal Reserve dropped its much-watched estimate of third-quarter 2022 GDP (“GDP now”) to just 0.3 percent on Sept. It recorded -1.28 percent, when the Federal Reserve in Atlanta expected it to print at +0.3 percent. (Move your cursor over each bar, here, to see the interaction between the “GDP Now” items.)
The 75 basis point increase was largely priced in the market, and most observers expected it. Some expected — and feared — a rise of 100 basis points, or 1 percent. With that said, the market reacted negatively to the rate hike, and the Dow Jones Industrial Average fell 1.7%. The benchmark S&P 500 fell by the same percentage.
What rattled the market seemed to be the so-called disappointing “dot plots” by the Federal Reserve, the official “Summary of Economic Outlook”, also released on September 21, prepared by members of the Federal Open Market Committee, a policy Federal Reserve Bank. – Making the arm and their capitals.
Dot charts are basically predictions about the future direction of the economy at the end of the year in the current years, the next three years and the long run, analyzing gross domestic product (GDP), unemployment, inflation, and interest rates.
None of the forecasts are good. As shown in the set of columns on the far right, the GDP range has moved from -0.3 percent in 2023 to 2.6 percent in 2024. The so-called “central trend”, where most estimates tend to be (the top three and the bottom three It) – and my best estimate – showed a GDP growth of no more than 2%.
I can only think that even the central trend range of the estimates is optimistic. I suspect inflation will have a longer tail than the 2023/2024 lows that the central trend will indicate. I would expect that the federal funds rate, the rate that the Fed charges its member banks, should be in the 5-6 percent range to reduce the rate of inflation, especially if job strength (which we often attribute to a low labor participation rate) continues . (The 5-6 percent we think is necessary is the rate to keep inflation stable at the Fed’s preferred rate of 2 percent; what Fed watchers call the “final interest rate.”)
The flip side to lowering inflation is reducing the Federal Reserve’s balance sheet. While the Federal Reserve increased the Fed’s asset “burn” to $95 billion this month, we’ve long felt that amount wasn’t enough. The assets – which consist of Treasuries and mortgage-backed securities (MBS) – can be sold rather than “burned”. Federal Reserve Chairman Jerome Powell said he did not rule out that possibility, at least for MBS, but not for now. Selling Mohammed bin Salman would reduce the cash balance in the economy, creating some liquidity risk, but also reduce inflation.
One aspect of the continued rise in interest rates is the continued dominance of the US dollar in the currency markets. For multinational companies, this will lead to lower profits from abroad as profits are translated. As we wrote earlier this week, companies like Federal Express will suffer these types of translation losses in addition to margin pressure.
We revised our GDP estimates for the quarter to -0.5%.
disclosure: The opinions expressed, including the results of future events, are those 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. The statements contained herein do not represent and should not be considered investment advice. You should not use this article for this purpose. This article contains forward-looking statements about future events that may or may not develop in the author’s opinion. Before making any investment decision, you should consult investment, business, legal, tax and financial advisors. We collaborate with Technometrica’s principles of surveying in some elements of our business.
We do not have a stock, option or similar derivative position in any of the companies mentioned, and we have no plans to initiate any of these positions within the next 72 hours. I wrote this article myself and it expresses my own opinions. I do not receive compensation for this (other than The Epoch Times as a business columnist). I have no business relationship with any company whose stock is mentioned in this article.