The Blind Leading The Blind: GDP, Rates, and Wall Street’s Missteps

GDP numbers came in weaker than expected, with a 1.6% annualized growth, marking the slowest quarterly gain in nearly two years. The market reaction was swift and harsh; Wall Street saw significant drops across the board as hopes for an imminent rate cut from the Federal Reserve dwindled.

Contrary to widespread anticipation, I maintained for months that there would be no rate cut at the June meeting, a prediction validated by today’s events. Despite Wall Street’s fervent projections, which had put the odds of a rate cut at around 70%, the reality has proven otherwise. Today, top analysts are scrambling to adjust their forecasts, realizing they’re months behind the curve.

This isn’t a new trend. Wall Street has a track record of erroneous predictions regarding rate cuts for almost two years. They’ve repeatedly pushed back the anticipated pivot date for rate cuts, only to be consistently proven wrong. Now, with the possibility looming that there might not be any rate cuts this year, it’s evident that relying on Wall Street forecasts alone is a risky venture.

The current economic landscape presents a concerning scenario: slowing growth coupled with rising inflation, hinting at the spectre of stagflation. Despite the Fed’s assurances and carefully laid plans, the assumption of an inverse correlation between interest rates and inflation lacks empirical evidence. History has shown us that the Fed often follows market trends rather than leading them, indicating a reactive rather than proactive approach.

Fed Chair Jay Powell’s recent remarks echo the ongoing uncertainty surrounding monetary policy. The Fed faces the dilemma of not wanting to cut rates too soon for fear of stoking inflation, yet also hesitant to keep rates high and risk recession. With today’s GDP figures reflecting a slowing economic engine, the narrative of Fed omniscience begins to unravel.

In reality, the Fed’s influence might be overstated, and Wall Street’s reliance on their forecasts misguided. It’s a case of the blind leading the blind, with bad models consistently leading to flawed predictions. As investors navigate this uncertain terrain, it’s crucial to maintain a critical eye on both Wall Street projections and the Fed’s rhetoric.

In conclusion, today’s GDP numbers serve as a stark reminder that economic forecasting is an imperfect science, and blind faith in either Wall Street or the Fed is a perilous game.

Sven Franssen