Drew Matus, economist at Merrill Lynch, is throwing more kaka into our forecasting potion (here is the podcast):
- Q2 ‘08 GDP positive, stimulus checks are fading
- Q3 ‘09 GDP negative
- Inflation remains very elevated all this year, Bernanke is stuck with 2% Fed Funds rate
- Finally, inflation is dropping sharply down to 1.6% core rate in Q1 ‘09
- Bernanke’s hands are finally free, he will immediately cut another 50 bps down to 1.5% before March
- Nominal GDP growth for the whole 2009 is below 2%
- Unemployment up to 6.4% in 2009
This official forecast from Merrill is quite strong and fits nicely with my intuitive expectations. Will Bernanke ever go below 1.5%? It’s an open question so far. There is a very big stigma coming with 1.25% interest rates, because we’ve already been there. As Matus said, he regards Fed funds rate as the price for a safe deposit. If you want to get anything above that you need to take risk, so low rates are pushing lenders to go out and look for risk to take. Will they?
The reasons for the economy to deteriorate sharply starting July/August:
- Stimulus checks are fading, that was a one-time effect
- States have new fiscal year starting July 1st. This is when budget cuts are taking effects and have a chain effect on local economies
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Finally, inflation is dropping sharply down to 1.6% core rate in Q1 ‘08
Should that be Q1 ‘09? And is that the official “core rate” which is such a joke?
Inflation may moderate buy prices will very likely still be high. Inflation is bad, but sticky high prices are just as bad because that’s the problem with inflation — it produces high(er) prices (relative to incomes).
IMO Bernanke would make himself a laughing stock by cutting again, regardless. But he seems somewhat buffoonish so who knows.
BTW, what’s the plan with all the paper the Fed has accepted? Again it seems more like asset deflation and consequent balance sheet destruction has been the big problem and thus the primary concern of the Fed, at least regarding the creation of these ‘alphabet soup’ lending programs. And at this point it’s just as clear — or should be — that low interest rates haven’t done anything about that.
Drew Matus sounds like he should go to work for CNBC with this forecast.
Bernanke can cut rates to zero and it is not going to change the fact the banking system is or is well on the path to becoming insolvent. Low interest rates cannot cure insolvency.
Banks will remain deathly allergic to risk for the foreseeable future.
Best case scenario for the US — Japan Redux.
Worst case scenario for the US — Not sure we even want to discuss.
The plan regarding all that paper the Fed has accepted is to keep rolling it over as long as possible.
eah, that was a typo, thanks.
Yes, this is why he made a prediction on core inflation rate but not the headline rate. Core rate is something economists can predict, while the headline inflation in Q1′09 could be anything. I can believe any number between 0% and 6%. It depends on issues that are not predictable.
>>> IMO Bernanke would make himself a laughing stock by cutting again
I’m afraid when he will be cutting in Q1 nobody will be laughing.
>>> BTW, what’s the plan with all the paper the Fed has accepted?
Feds have the first hand in any dispute. If the bank goes belly up Feds will take all assets to cover the loan and only then the other creditors will pickup the rest. I don’t think Feds will lose much, if at all.
>>> low interest rates haven’t done anything about that
I think interest rates are set by the market. Bernanke was cutting just to rubber-stamp what the market already said. So saying that he helped or not helped anything is probably similar to discussing if the weather service helped avoiding hurricanes last season.
>>> Bernanke can cut rates to zero and it is not going to change the fact the banking system is or is well on the path to becoming insolvent.
Ken, let me defend Drew Matus. He said nothing that rate cuts are going to help, he only said that they will happen.
He said the nominal GDP growth below 2% in ‘09. Please agree that this forecast make the possibility of substantial headline GDP decline possible. He did not make the lower bound, only upper bound. Second, the headline GDP is nominal minus inflator, which could be pretty high.
“Former Fed Chairman Alan Greenspan predicts in a new book out Monday that the Fed will have to raise interest rates to double-digit levels in coming years to thwart inflation.”
Just like the good ole’ late 70’s, if were really lucky.
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