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After sifting through the United States Federal Reserve\u2019s forecasts and Jerome Powell\u2019s cadence at the press conference, it seems the entire two-day Federal Open Market Committee meeting this week was spent discussing one thing and one thing only: how far and how fast to cut rates over the next two years.<\/p>\n
So why did the Fed pull this\u00a0mea culpa<\/em>\u00a0on Dec. 13? The answer is that the Fed is increasingly looking beyond the incoming and oft-revised economic data (with lower-than-normal response rates) and focused much more on what its business contacts are telling them. Nobody seems to believe a recession is plausible and yet the most recent Beige Book shows two-thirds of the U.S. is either flatlining or contracting outright (not one is accelerating). This is a greater share than we saw heading into the 2001 and 2008 recessions.<\/p>\n<\/section>\n\n
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The Beige Book confirmed our suspicion that the third-quarter gross domestic product report was an aberration and likely borrowed heavily from future growth. Keep in mind that when it concluded that \u201ceconomic activity slowed since the previous report,\u201d that followed a statement that \u201cmost districts indicated little to no change in economic activity\u201d and that was from six weeks ago. Going to\u00a0\u201cslowed\u201d\u00a0<\/em>from\u00a0\u201clittle or no change\u201d<\/em>\u00a0is contraction when you look at the wording from a perspective of economic momentum.<\/p>\n<\/section>\n\nArticle content<\/p>\n
That is what the Fed is responding to, and the rate cuts being predicted still likely won\u2019t be enough. As for inflation, these five words from the Beige Book surely resonated: \u201cConsumers showed more price sensitivity.\u201d\u00a0<\/em>That says a lot right there.<\/p>\nAs an aside, the Fed is calling for a tepid 3.8 per cent nominal GDP growth next year, but the stock market is pricing in 10 per cent growth in earnings per share. Both can\u2019t be right. Given what the monetary policy lags imply and the withdrawal of fiscal stimulus means for real GDP growth for 2024, we are likely talking about real growth of no better than one per cent and quite possibly zero. Our models are tracking sub-one per cent headline and core inflation for next year. That means that even 3.8 per cent nominal growth is going to be very difficult to achieve. Think two per cent nominal. That is rare, but not unprecedented: we saw this in 1949, 1954, 195, 2008 and 2009. All recessions.<\/p>\n<\/section>\n