US Economic Forecast: Fed To Raise Interest Rates In Late 2009 Or Early 2010

The worst part of this forecast update is history.  The fourth quarter is still a forecast, because we won’t have official GDP data for another couple of weeks, but the monthly numbers we have are looking worse and worse.  As I mentioned recently, exports, are diving.  Then we got worse-than-expected news on December retail sales.  We knew it would be bad, but not quite this bad.

Looking forward, we still have a lot of monetary stimulus in the pipeline.  In my book, I described a very reliable phenomenon.  When the Fed starts to stimulate the economy through monetary policy, there will be an article in the New York Times or the Wall Street Journal (or both!) saying that monetary policy no longer works.  There will be no mention in the article about time lags.  Then the Fed’s actions will kick in, surprising the pessimists.  We’ll also see consumers kick in, as I mentioned in a video, as implied by the charts in a prior post.

So here’s my economic outlook:

The early quarters of recovery are sub-par.  We will not have the usual make-up-for-lost-growth experience, because the economy’s usual “low gear” is housing construction.  The overhang of excess supply will dampen new construction.  The key turnaround will be in consumer discretionary spending.  I think the fiscal stimulus package will occur too late to trigger the turnaround.  After the economy gets going, the public works elements of the stimulus package may offset reductions in defense spending.

If I’m right, then late 2009, or early 2010, the Fed will either raise interest rates sharply, or let inflation accelerate.  I believe they’ll raise rates, but one of my respected colleagues makes a strong argument that the Fed won’t raise rates, they’ll let inflation get going.  That’s a real risk, but I’m sticking with higher interest rates as the more likely event.

I know plenty of folks can’t believe that this recession will end soon.  Let me note first that my forecast isn’t very optimistic, because of the lackluster recovery.

Second, behavioral finance research has confirmed “recency bias.”  People tend to overweight recent information.  I think that’s part of the doom-and-gloom mood right now.  People are forgetting that we always get over recessions.

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Comment by CZ

2009-02-13 09:31:34

I think that the flaw in your analysis is the fact that this is not a recession. The exisitng momentum of lay-offs continues. This mean sfuture decline in economic activity.

Different from other cyclical recessions, this is not cyclical.

Autos will not hire more workers, Suppliers will not hire more workers and those to be hired will be at a fraction of present and past pay.

Disposable income will collapse for a large portion of teh population

We are now in downword spiral created by

a) The “Chinese revival”
b) The executivre pay structure
c) Health industry crippling effects
d) Energy dependency and funding indirectly of unwanted activities

b) c) and d) are under our total control (provided honesty and ethics still exist)

a) Is more complex and may not have a clear solution

Until these four elements are resolved the down-spiral will continue.

All these stimulus packages are barely “cold medicine” against pneumonia.

No, this is not a recession

CZ
CZ

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