Fed Can’t Tell You The Truth

The Fed isn't that bad at forecasting. They just can't tell the truth.

Imagine that on Wednesday, the Fed released projections of a 2% economic decline next year. Immediately, the market would have sold off by 5%, and the media would run with the story causing consumption to contract, and, voila, you have a recession.

These forecasts are always overly optimistic and gradually reduce to align with economic realities. Such allows the market to adjust without creating a dislocation driven by panicked selling. The chart below shows the annual downward adjustments to the economic forecast each year.

‌‌We believe a recession seems highly probable if the Fed's end game of rate increases is higher unemployment and lower inflation. The only way to achieve that with rate increases is to destroy demand which ultimately slows wage growth. The economic data already seems well tilted into a recessionary trend. The composite economic index is already signaling a sharp slowdown in economic activity, and we suspect it will deepen next year.

As noted above, IF the economy slows markedly next year or falls into a recession, the market will need to reprice for lower earnings. Given the Fed is continuing to hike rates, that repricing seems inevitable as history shows that Fed rate hikes also align with peak earnings followed by contractions.

By Lance Roberts