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The Fed’s rate-cut projections indicate an impending recession, warns economists.

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Prominent economist David Rosenberg raised the alarm in a recent paper, arguing that the Federal Reserve’s interest rate predictions are warning signs of an approaching recession. Renowned economist Rosenberg drew attention to the alarming signs coming from the Fed’s most recent projections.

Interest rate changes have historically been a strategy used by the Federal Reserve to manage economic volatility. Rosenberg did, however, draw attention to a notable departure from custom. The Fed has always chosen to make modest reduction during soft landings, usually of 75 basis points, but the latest estimates show a quite different story. Rosenberg claims that the Fed’s projections show a significant 150 basis-point decline by 2025, indicating a more serious worry about the direction of the economy.

Rosenberg explores historical antecedents in his argument, pointing out examples where the Fed’s actions were similar to the current course. He draws attention to prior instances of gentle landings, including those that occurred in 1987, 1995, 1998, and 2019, during which rate reduction were more cautious. The economist does, however, highlight the oddity created by the current circumstances and the infrequency of such large rate cuts outside of certain economic settings.

Rosenberg warned, pointing out the underlying message in the Fed’s projections: “The Fed doesn’t want to say this explicitly, but it is actually saying (in not so many words) that a recession is very likely coming our way.”

Rosenberg’s worries go beyond monetary policy to include the effects on investors. Participants in the stock market are excited about the central bank’s shift to more accommodating policies due to the possibility of impending rate reduction. Rosenberg, however, advises investors to exercise prudence and control their exuberance. He points out that historically, recessions are correlated with simultaneous drops in bond yields, equities prices, and interest rates.

The interdependence of financial markets during economic downturns is highlighted by Rosenberg’s warning that “interest rates, bond yields, and equity prices all go down in tandem during recessions.”

In addition, Rosenberg highlights a concern about the leveraged loan market by highlighting the increased risks in the face of economic uncertainty. Citing concerning increases in defaults—the delinquency rate is already over 6%—he makes comparisons to other recessions, such as the turbulent years of 2001, 2008, and 2020. Leveraged loans’ fragility becomes more noticeable when economic headwinds intensify, which presents more difficulties for investors navigating choppy waters.

Rosenberg’s research serves as a sobering reminder of how precarious the state of the economy really is. The challenges ahead are stark, as seen by the Federal Reserve’s rate-cut predictions and growing worries in the leveraged lending market. Rosenberg’s observations highlight the significance of alertness and responsible risk management in negotiating the choppy waters of today’s financial environment, as investors brace for possible headwinds.

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