Fed and Wall Street Differ on Recession

In the middle of last week, the Federal Reserve Chairman pointed to indicators which showed that the long-anticipated recession was a non-event. The US GDP was on a trajectory with a near 2% growth figure. When coupled with better than expected employment figure projections and the containing of the Silicon Valley Bank collapse, little wonder the Central Bank is optimistic.

The news comes as a huge relief to, well, just about everybody. Even the sceptics, who doubted the Fed could engineer a soft landing. A soft landing is defined as raising interest rates just enough to prevent excessive inflation, whilst not encouraging a downturn.

Wall Street is not so convinced, however. Investors tend to also look at Gross Domestic Product (GDP), a measurement of what the economy produces. Then measure GDP against Gross Domestic Income (GDI), a measurement for salaries and profits. If the gap between the two is wide, investors are reluctant to forecast good news. Well, it’s at its widest since the end of World War 2.

This is the main reason why the Fed and Wall Street differ on recession fears. There is another reason, which is more about reputation than actual. The Fed is notoriously optimistic, in the minds of investors and analysts. One particular investment analyst noted that his profession tended to take the Fed’s positive announcements not with a pinch, but a ton, of salt.

Optimism Works Harder than Pessimism

However, Fed staff forecasts have proved to be more accurate than private forecasting. Studies completed as far back as 2000 and as relevant as two years ago bear this out.

It also should be noted that the trust investors seek from brokers tends to be earned from moderate to cautionary advice. If the Central Bank is optimistic with a series of tried and tested actions, that in itself is the first step in halting an economic decline. If the Fed and Wall Street differ on recession fears, I’m going with the Fed.

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