KINGSTON, NY, 27 MARCH 2019—Beyond the accelerating global economic slowdown, we forecast a weakening U.S. Gross Domestic Product and lower corporate earnings will require the U.S. Federal Reserve to lower interest rates now before economic conditions markedly deteriorate.
As long noted, the recovery from the Panic of '08 was fueled and sustained by central banks pumping in some $26 trillion of zero/low/negative interest rates, quantitative easing and other lines of liquidity provisions into financial systems. Economies did not grow as a result of basic economic fundamentals, rather they were artificially inflated by heavy doses of monetary methadone.
Globally, the Organization for Economic Cooperation and Development has cut its economic growth forecast for 2019 to 3.3 percent and in the U.S., the National Association for Business Economics predicts growth will slow to 2.4 percent this year and just 2 percent next year.
Our forecast, however, shows U.S. growth sliding below 2 percent this year and into recession territory in 2020 if the Federal Reserve does not proactively lower rates before growth indicators dramatically decline.
Indeed, with a proven track record of failing to identify the trends that signaled the Panic of '08, the Fed is once again relying on the same "data-based judgment" formula that failed them a decade ago.
As the real estate markets were melting down in February 2007, then Federal Reserve Chairman, Ben Bernanke declared, "There is not much indication at this point that subprime mortgage issues have spread into the broader mortgage market, which still seems to be healthy."
Doubling down on the Fed's ineptness to understand the current events forming future trends, Bernanke acknowledged in his 2015 book, regrets "over the Fed's failure to identify the scope of the financial disaster ahead."
Reacting, rather than pro-acting, after the Dow suffered its worst December since the Great Depression and equity markets across the globe sunk into bear and correction territory, U.S. Federal Reserve chairman Jerome Powell did a U-turn on 4 January by reversing the Fed's aggressive interest rate policy for 2019, pledging to be "patient" in raising rates.
After a decade of artificial stimulus, the U.S. Fed is among a dwindling number of central banks that still has room to cut rates. And while doing so will stabilize equity markets and keep the economy from sinking into recession, future rounds of monetary methadone injections will be temporary.
TREND FORECAST: We are forecasting that while U.S. equities will be volatile for the remainder of 2019, should corporate earnings remain solid, markets will modestly trend upward.
However, should the Federal Reserve rely on its data-based formula and fail to lower rates ahead of negative trend indicators, we forecast a rapid economic and equity market downward spiral.
Considering that President Trump continually denounces the Fed for their aggressive interest rate policies – and that the 2020 race for the White House has already begun – we also forecast Mr. Trump will further pressure the Fed to lower rates.
And, while lower interest rates should push the dollar lower, considering the depth and scope of the global economic downturn, it will remain relatively strong compared to other currencies.