Yield Curve Keeps Sending Message Investors Should Not Ignore
The Fed’s “soft landing” hopes are likely overly optimistic. Such was the context of our recent report, which discussed the long record of the Fed’s economic growth projections. To wit:
“However, there is a problem with the Fed projections. They are historically the worst economic forecasters ever. We have tracked the median point of the Fed projections since 2011, and they have yet to be accurate. The table and chart show that Fed projections are always inherently overly optimistic.
As shown, in 2022, the Fed thought 2022 growth would be near 3%. That has been revised down to just 2.2% currently and will likely be lower by year-end.”
As we noted, the Fed’s outlook for more robust growth allowed them to keep one rate hike on the table. While the prospect of further rate hikes spooked the stock and bond markets immediately following the announcement, as we discussed, such was needed to keep markets in line.
“The Fed projecting one last rate increase is also a way of preventing investors from immediately turning to the next question: When will the Fed cut? The risk is that as soon as investors start doing that, rate expectations will come down sharply, and with them, long-term interest rates, providing the economy with a boost the Fed doesn’t want it to receive just yet.
That is right. Since October last year, the market has been hoping for rate cuts and increasing asset prices in advance. Of course, higher asset prices boost consumer confidence, potentially keeping inflationary pressures elevated. Keeping a rate hike on the table keeps the options for the Federal Reserve open.“
Are the Fed’s “soft landing” hopes wrong?
“On the eve of recessions in 1990, 2001, and 2007, many Wall Street economists proclaimed the U.S. was
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