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Economic Gauges Reveal Potentially Stark Future

May 6, 2019

|Daniel A. White

Last month the Federal Reserve pulled a 180.

It said rates would not change, signaling a dovish turn away from the promised “normalization” we were moving towards (a promise a decade in the making, by the way).

This month? It seems the monetary policy body has almost thrown in the towel because quantitative easing could be back, and we’re not even in a recession (yet).

The Fed began to steadily raise rates in 2016, though the Federal Funds target rate never returned to 3 percent. And as the chart below shows, rates are below what we could expect before the financial crisis.

Much of the reluctance to end the cheap-money bonanza stems from the Fed’s concerns over the strength of the economy overall. Even though job growth has been good over recent years, which would seemingly be proof of a strong economy, other indicators point toward less strength.

For instance, the data on workforce participation, wage growth, net worth, auto loan delinquencies and other measures say Americans are worse off than the news otherwise suggests.

The Fed’s March 2019 meeting was largely an exercise in fixing its late 2018 mistakes, which were mostly in raising rates. The result? The policy committee downgraded its assessment of the economy and held interest rates steady.

But less expected was the downward revision to the dot plot, where the majority of participants anticipate no rate hikes in 2019. The median expectation is for one rate hike in 2020. And many people are even calling for the Fed to still cut rates.

Meanwhile, the yield curve is inverted, which has proceeded each of the last seven recessions. When will it hit? It could be months or years.

Nevertheless, all these signs point to one thing – prepare your portfolio.

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