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Daily Blog

Thursday, March 21, 2019

What happened to the four rate increases and the federal funds interest rate rising to 3.5%? Well, it seems that the Federal Reserve was looking at the wrong indicator for signs of “overheating.” The Fed was scope-locked on watching real GDP growth surge to a 4% range instead of watching for signs of benign inflation, which by Fed Chair Powell’s own admission is now below expectations for both its core and headline gauges. The Fed was determined to get GDP growth to “trend,” but its 2.1% growth estimate for 2019 may be in error, especially after U.S. growth surged to 2.9% in full-year 2018.

What would Fed policies have been if the growth trend truly were 3%? GDP growth does not presently seem to be causing inflation pressure, so why not let it run? Here we are now with the 10-year U.S Treasury yield plummeting to 2.51%, the Atlanta Fed’s GDPNow 1Q19 forecast at an abysmal 0.4% and the International Monetary Fund having twice downgraded its 2019 global growth forecast — currently at 3.5% — driven by Europe and China, two of our “Big 3.” The good news is that the United States, the third of the Big 3, continues to get a boost from low tax rates and a pro-business regulatory backdrop; my expectation is for an improved second half of 2019. But for now, low bond yields are sending a dire message.

For an explanation of the Big 3, please see Global Perspectives 2019 forecast, “The Storm before the Calm.”

Weekly Commentary & Statistics

Monday, March 18, 2019

Stock markets rallied for the week, with the major U.S. indexes nearing their highest levels of the year.

Quarterly Commentary & Outlook

December 2018

In 2019 we expect, and prudent investors should prepare for, “the storm before the calm” — tighter monetary conditions, uncertainty that includes a “disorderly Brexit” and increasing tensions between China and the United States on multiple fronts. We expect a storm though, nothing more.

  • Exceptionally strong economic growth has prompted the Fed to raise interest rates, reduce the balance sheet and generally to “Rip the Bandaid Off” from a zero rate environment.
  • The subsequent surge in volatility is cleaning house from rampant speculation that needed to be unwound - setting the stage for a healthier and calmer market in the future.
  • Two of the “Big 3” — China and the Eurozone — are struggling for geopolitical reasons but also due to the U.S. regaining its ranking as the most competitive country in the world.
  • Investors should prepare for the “storm” of tighter monetary conditions and greater geopolitical uncertainty but not at the expense of losing sight of our forecasted “calm” outlook.
  • Diversify, be disciplined and do not forget your ABCs — which in our 2019 forecast extend all the way to J-Jobs.

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