ROSENBERG: ‘The Fed seems willing to play with fire’

If market predictions are correct, the Federal Reserve is unlikely to announce an interest-rate increase after its two-day policy meeting concluding on Wednesday.

But the Fed could use its statement and press conference to indicate that it plans to continue raising rates, possibly in December.

David Rosenberg, chief economist at Gluskin Sheff, is one of a number of economists who think the Fed has no business raising rates right now.

In his contribution to Business Insider’s ‘most important charts‘ feature, Rosenberg highlighted a broad economic indicator that may already be in recession, which should deter the Fed’s bias to hike.

He described it as cyclically sensitive GDP, which includes consumer spending on durable goods, housing construction, business capital expenditure, and inventory investment. It excludes spending by the government, on services, non-durable goods, and net exports.

Rosenberg said:

“There may be a slate of reasons for the Fed to raise rates — to cure financial excesses, to assist savers, to ease the pressure in the pension fund and insurance industries, and to help banks expand their tight margins — but if it is about data-dependency, we have a barometer here that has an 80% track record in predicting recessions.

No slam dunk, there is no such thing, but the Fed seems willing to play with fire.”


He noted that the indicator shrank at a 3.2% annual rate in the second quarter, the biggest drop since the end of the Great Recession in 2009.
Only twice since the 1960s has this kind of contraction not led to a recession, he noted.

“The big difference? In those two other such episodes, the Fed was cutting rates — by 150 basis points both times — as opposed to raising them (or threatening to do so).”

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