- The Fed's interest rate forecasts signal an imminent recession, economist David Rosenberg says.
- In previous soft landings, the Fed usually cut rates by 75 basis points, but they're forecasting a 150 basis-point reduction by 2025.
- Stock investors are eagerly awaiting the central bank's pivot to looser monetary policy.
The Federal Reserve's interest rate forecasts are flashing warning signs of a recession just around the corner, top economist David Rosenberg says.
"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 said in a note on Thursday.
Despite the Fed's optimistic forecast of 2.1% GDP growth and a 4% unemployment rate, Rosenberg sees officials' prediction of a sharp drop in the median federal funds rate as a recession indicator.
The Fed anticipates the median federal funds rate will drop by 150 basis points to 3.875% by 2025 and by 225 basis points to 3.125% by the end of 2026.
Rosenberg said in past instances of a soft landing in the economy, the Fed typically reduces rates by 75 basis points, as seen in 1987, 1995, 1998, and 2019. The only exception was September 1984 to August 1986 when rates saw deeper cuts following a 60% collapse in oil prices.
"Outside of that episode, any move down in the funds rate during the post-WWII era anywhere close to -150 basis points (the forecast by the end of 2025) only occurred because of one thing…" he wrote.
As the Fed has shifted focus to combating recession, stock investors are eagerly anticipating a series of rate cuts starting this year.
"I say be careful what you wish for. In recessions, interest rates, bond yields and equity prices all go down in tandem," he said.
The president of Rosenberg Research also warned investors about the perilous terrain of the leveraged loan market, especially as economic downturns loom larger.
"Defaults are now piling up as the delinquency rate has topped 6%, double the average since 1997, while fast approaching levels that touched off the 2001, 2008 and 2020 recessions," he added.