Finance

Economists say Fed rate cut forecasts point to looming recession


Yuichiro Kino/Getty Images

  • Economist David Rosenberg said the Federal Reserve’s interest rate forecasts are a sign of a coming recession.

  • In previous soft landings, the Fed has typically cut interest rates by 75 basis points, but they forecast a 150 basis point cut by 2025.

  • Equity investors are eagerly waiting for central banks to shift to looser monetary policy.

Top economist David Rosenberg said the Fed’s interest rate forecasts flash warning signs of an impending recession.

“The Fed doesn’t want to say it explicitly, but it is effectively saying (in few words) that a recession is likely coming,” Rosenberg said in a note Thursday.

Despite the Fed’s optimistic forecasts for GDP growth of 2.1% and unemployment of 4%, Rosenberg still viewed officials’ forecasts of a sharp drop in the median federal funds rate as an indicator of a recession.

The Federal Reserve predicts that by 2025, the median federal funds rate will fall by 150 basis points to 3.875%; by the end of 2026, the median federal funds rate will fall by 225 basis points to 3.125%.

Rosenberg said that in past examples of soft landings, the Fed has typically lowered interest rates by 75 basis points, such as in 1987, 1995, 1998 and 2019. The only exception was from September 1984 to August 1986, when interest rates were lowered further. Oil prices plunged 60%.

“Except for that event, any decline in funds rates approaching -150 basis points (expected by the end of 2025) in the post-World War II era is due to one thing…” he wrote.

What happened in the S&P 500 from the initial rate cut to the market’s final bottomWhat happened in the S&P 500 from the initial rate cut to the market’s final bottom

What happened in the S&P 500 from the initial rate cut to the market’s final bottomSource: Bloomberg, Rosenberg Research

Stock investors are eagerly awaiting a series of rate cuts to begin this year as the Federal Reserve turns its focus to combating the recession.

“I would say, be careful what you wish for. During a recession, interest rates, bond yields and stock prices all fall in tandem,” he said.

The president of Rosenberg Research also warned investors of the dangers facing the leveraged loan market, especially as the recession deepens.

He added: “With delinquency rates already above 6%, twice the average since 1997, default rates are increasing and rapidly approaching levels that triggered the recessions of 2001, 2008 and 2020.”

Read the original article business insider



Source link

Related Articles

Leave a Reply

Your email address will not be published. Required fields are marked *

Back to top button