The Federal Reserve - Out of the Box Forecasts

In a controversial research report released this past Friday, Apollo Global Management's Partner and renown Chief Economist Torsten Slok said that he now believes that the U.S. Federal Reserve may NOT cut interest rates at all in 2024. To say that this is "out of the box" thinking is an understatement! The consensus view among Wall Street pundits now is for three 1/4-point cuts in the Fed Funds target sometime over the next 10 months probably beginning in May or June 2024. What's even more remarkable about Mr. Slok's forecast is that less than 9 weeks ago, the consensus view was for six 1/4-point cuts in 2024.

Given Mr. Slok's excellent forecasting record and his extraordinary resume, it would be foolish not to at least consider his remarkable view.

Having seriously considered Mr. Slok's forecast here and now, I can write without hesitation that I don't agree with it and I will even make the bold suggestion that the probability that Mr. Slock is correct here is near zero!

Over the last month, New York Community Bank (NYCB) shares have fallen from just over $10/share to near $3/share as exposure to the commercial real estate market seems to have adversely impacted this regional banks balance sheet and its potential profitability. This bank's CEO stepped down late last week and rumors of potential reporting improprieties have surfaced.

It's not a reach here to suggest that given the general weakness in the commercial real estate market nationwide, NYCB's troubles may very well be the tip of the iceberg for regional banks generally.

Here in Chicago, it's not hard to see the evidence first hand. On State Street, Chicago's "Great Street", 50% of the storefronts are now vacant!

While Jamie Diamond at JP Morgan, and others like him, would like managers to return to their cubicles at corporate offices nationally, managers are reticent to cooperate given the COVID-related change in culture to working from home or at least working in some sort of "hybrid" situation (split home and office hours).

To think these problems in the commercial real estate market will disappear quickly is fraught with risk and denies the obvious!

While the current consensus view on three 1/4-point interest rate cuts in 2024 is probably correct, if NYCB's troubles are not isolated to New York, then six 1/4-point cuts could quickly be back on the table for the Federal Reserve to consider.

And one last very important question to consider please: IS THE U.S. FEDERAL RESERVE TRULY AN INDEPENDANT AGENCY? In normal times, the answer may be "YES", but these are not normal times.

If I am right, and if in fact politics are now a factor in the thinking of the Federal Reserve, what do Fed officials really think about the possibility of a 2nd term by Donald Trump. Surely they must know that if elected in November, Mr. Trump will replace the current Chairman of the Federal Reserve and everyone else he can to control this key institution. Given that my premise is right, that politics are now a variable in Federal Reserve monetary policy, then the current Fed will use ANY weakness in the economy (any weakness at all) from here until the election as an excuse to lower interest rates (in order to favor the re-election of Joe Biden)!

For traders and investors, the path forward is simple: Buy gold! Buy Silver! Buy Gold mining shares! Buy Silver mining shares! NOW!!