Traders Are Expecting a Recession

At its most recent meeting, the Federal Reserve raised interest rates. This was in line with expectations. Analysts warned the rate hike was coming for months.

But the Fed delivered a surprising outlook for next year: Officials expect strong economic growth.

We saw this when the Fed released an update to its dot plot. Analysts think of this chart as the clearest explanation of what the Fed’s plans are.

In the dot plot, each voting member of the Federal Reserve places a dot where they expect interest rates to be in the future.

Below is the latest dot plot. This chart also shows previous forecasts and the market forecast for interest rates over the next year.

(Source: Wells Fargo Securities Economics Group)

The line at the top is the Fed’s forecast from December 2015. Official interest-rate forecasts have fallen steadily lower over time.

The line at the bottom is the market’s forecast for short-term interest rates. Traders don’t believe the Fed will raise rates three times in the next year.

Interest rates reflect the cost of money. When the economy is growing, demand for money increases.

Businesses want to borrow to build new factories and stores. Consumers want to borrow to buy large items like cars. The Fed raises rates to slow growth because it believes growth will lead to inflation.

Normal short-term rates would be about 3.5%. That’s the level the Fed expected in 2015. Because of slow growth, the Fed now expects rates to be about 2.75%. The market is pricing in rates of about 2%.

Low rates mean slow economic growth. Traders are expecting the next recession, possibly starting at the end of next year. This is consistent with my indicators. Stock prices tend to rally strongly before a recession.

All this means now is the time to buy stocks for quick gains before the next recession hits.

Regards,

Michael Carr, CMT

Editor, Peak Velocity Trader

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Comments 6

  1. H. Craig Bradley December 27, 2017

    NEW YEAR’S EVE RESOLUTIONS

    Each year, I often hear the same old predictions such as a correction is coming or interest rates will spike and its always the same story “Next Year”. The plain truth is nobody knows what “next year” will bring or what exactly will happen. ( Clueless in Seattle ). So, once again its “next year” every Dec. until, like a broken clock, the time rings true. Please spare me.

    Reply

  2. H. Craig Bradley December 27, 2017

    GON ( God Only Knows ).

    Reply

  3. Richard Bosshatdt December 28, 2017

    Gentlemen,

    I wish you would make up your collective minds about the stock market: will there be a substantial pull back soon before it goes higher, Or willing to continue to go higher?

    RICHARD BOSSHARDT

    Reply

  4. Duane Mazeska January 3, 2018

    We are due for a recession usually every ten years. My main concern is still the high debt which doesn’t assure the

    market of good growth. I always remember the old adage but low sell high. With the higher evaluation of stocks and everyone bullish I wouldn’t be so anxious to be long in the market. As I have stated before the two criterias for an empire to top out are debt and greed which makes me hesitant to be long at these present levels. With consumers high debt load I don’t expect to see near term demand. Good trading all!

    Reply

  5. Major Expansion of Edelson Wave Roster: New Experts Joining our Team! – Retirement Cheat Sheet January 4, 2018

    […] Michael is a self-described “systems trader.” He believes in a highly disciplined approach to investing, buying and selling by means of rules-based systems — and rules-based systems only. Michael specializes in developing risk-off, trend-following strategies that investors can use to grow their wealth steadily and without fear of succumbing to the next market crash. You can read his latest article “Traders Are Expecting a Recession” by clicking here. […]

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  6. Bob January 5, 2018

    You say “high interest rates will hurt the economy”.
    I say “Yes, but only when they go above 8%”.
    Interest rates have been too low too long and hasn’t done any good.
    I would like to see 4% soon.
    Bob

    Reply