Danielle DiMartino Stands 1-on-1 with Lacy Hunt
Consider Danielle DiMartino Booth 1-on-1 with Lacy Hunt
The pair discuss liquidity, speed, the Fed PUT, QT, who is hurting inflation the most, the stock market sectors most affected, who is hurting inflation the most and when the recession will hit.
Booth noted that house prices are just starting to fall, so the CPI could be high in 2023.
“This is a problem the Fed has created for itself,” Lacy replied. And due to the slowdown in rent adjustments, “the Fed is being hit by the tail.”
But Lacy went on to say, “Inflation has clearly peaked and is going down.” Many will disagree with that, but I believe it is perfect.
Danielle commented: “It was intriguing to me that the assumption is that GDP would be 0.2 percent for all of 2022. Do you think they sent a message by lowering GDP so far to where it’s almost a rounding error and yet they remain as determined as they are. Am I reading too much into this?’Read:With mortgage rates above 6%, here’s what the Fed’s latest hike could mean
Lacy replied, “No, I don’t think you are. They did that for a purpose. They had a bad experience in June.”
Lost in this discussion is the fact that, after two quarters of negative GDP, the Fed’s 0.2 percent GDP Dot plot consensus for the year is a big boost from here on out.
My view was that the consensus forecast was wildly optimistic. The Fed just won’t admit the recession just yet.
So yes, I agree with Lacy, they did that for a purpose. But I see another goal: it’s much easier politically to raise interest rates if you don’t predict a recession than if you do.
Aside from that, Hunt was certainly right that enamored comments on questions after the July meeting sparked a stock market rally that the Fed didn’t want.
“Another thing they did was talk about 4.4 percent unemployment for next year, which, as one reporter pointed out, would reach the implied job loss to 1.3 million people,” Hunt noted.
He added: “The Fed is clearly bracing and they want market participants to understand that this is an important battle to be won, and that they will stay on track. Of course, we don’t know if they are the natural, but currently they are aware. But it will take time.”Read:AP: Probe finds evidence of bank boss’ romance with top aide
Booth asked Lacy the most important question
Booth: “Can the Fed raise rates and keep them high, keep them at a plateau? Looking back at monetary policy, we’ve never seen that happen.”
Lacy: No. I think there’s a good chance the Fed will make a rougher landing. If you look at the tightening of the Fed since the Fed’s inception in 1913, about 90% of the [tightening cycles] led to recessions.”
“The Fed can make a soft landing like in 1966, but those are pyrrhic victories that led to much more pain later on. The chances of a soft landing are very slim. The Fed has put itself in this situation.”
There is much more in the video, click the link above to play it. This is my take on the Fed’s GDP forecast.
Examining the Fed’s GDP Forecasts for 2022 and 2023
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Beware Wildly Optimistic Forecasts: Examination of the Fed’s GDP Forecasts for 2022 and 2023Read:Boeing to pay $200 million to settle charges in 737 Max probe
Each Fed participant projects a soft landing scenario for 2022 and 2023.
- The Fed, deliberately and carelessly dodging recession calls, never directly projects recessions. But from where we are now, their GDP forecast for 2022 goes beyond wildly optimistic and does not imply a recession.
- Also, there doesn’t seem to be any recession forecast for 2023.
- What makes 2023 somewhat debatable is the fact that the Fed’s GDP projections are Q4 to Q4, so technically there could be a brief recession in 2023 followed by a rebound in the second half of 2023.
- For 2022 it is clear. The Fed sees a recovery in the second half, not a recession, as the following chart shows.
Real GDP 2021-2022
GDP projection analysis (figures in billions of dollars)
- Real GDP in Q4 2021 was 19,806
- Real GDP in the second quarter of 2022 was 19,699
- For the Fed’s average year-over-year forecast to come true, Q4 1984 GDP would need to be6 or higher.
- That means real GDP should increase by 0.90 percent in the second half. And that would match the high GDP after Covid.
- On an annual basis, the Fed forecasts growth of more than 1.8 percent in the second half of 2022.
How likely is 1.8 percent yoy growth in the second half coupled with forecasts for Fed rate hikes as the third quarter looks set to be heading for a bust?
Double Fed Message
So yes. There was a message. A double message.
- We keep walking.
- We ensure a soft landing.
One thing that Lacy, Danielle and I agree on is that #2 is not going to happen.
So the Fed compounded its credibility problem with those predictions. But he’s afraid to walk while admitting a recession, one that I believe started in May.
This post is from MishTalk.Com
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