New York Fed President Predicts a “Hard Landing”
In a recent speech at the Securities Industry and Financial Markets Association in New York City, William Dudley, the New York Fed President, voiced his economic concerns for the coming year and beyond.
Though inflation is low, Dudley warned the economy is growing at an “above-trend pace” while the labor market is tightening, and will be boosted further by the recently enacted tax legislation.
All this is happening despite the Fed hiking rates by 125 basis points over the last two years, which suggests the three further planned hikes for this year may not make much of a difference either.
The whole point of the Fed hiking rates is to assert control over the market, encourage investors and banks to take fewer risks and start playing it safe by making it harder and more expensive to borrow money as opposed to people borrowing recklessly and getting themselves deeper into debt, which is exactly what’s continuing to happen.
An Unresponsive Market
However, despite the Fed’s best attempts, the market doesn’t appear to be paying attention. Dudley continued:
The market’s lack of response was shown by the latest results from the weekly St. Louis Fed Financial Stress Index. Made up of 18 components, it’s used to measure whether financial conditions are becoming easier or tighter. A zero measure means normal market conditions, whereas when it goes above or below, it means either below or higher than average stress on the market.
On November 3, the index was at -1.6, its lowest since 1994. Despite the Fed’s recent hike and “balance-sheet normalization,” results published last Thursday showed little improvement with a measurement of -1.57. Even the two-year Treasury reaching its highest levels since September 2008, closing at 1.96% on Thursday for a third day in a row is having little effect.
As a result, the two-year yield and the Financial Stress Index are out of sync. As the chart below shows, since the Fed started raising rates in 2016 the two-year yield rose, yet the Financial Stress Index fell.
A Shake-Up on the Way?
In response to this, Dudley hinted the Fed may enforce tougher measures in the future to assert control of the situation, predicting a “hard landing,” which could lead to a recession:
The market can only act on its own devices for so long. Despite the Fed’s flip-flopping in recent years, sooner or later it will have to start taking it seriously again. The danger is the longer it ignores the Fed, the harder it could come crashing back to reality — resulting in a shake-up that could hit the economy hard.
With experts like Dudley warning about chaotic times on the horizon, investors know they can only rest on their laurels for so long. A self-correction in the market is looming on the horizon and the risk of investors losing their wealth is growing greater. Now would be the time to take the steps towards protecting your wealth from the coming economic storm.
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