Is the Fed Leading the U.S. Into a Recession?

Jay Hatfield, chief executive and chief investment officer of Infrastructure Capital Advisors, has more than 35 years of experience on Wall Street as both an investment banker and as an investment management professional.

Jeff Benjamin: Has the Fed waited too long to cut interest rates?

Jay Hatfield: After the weak July employment report, with the unemployment rate rising to 4.3%, it is now market consensus that the Fed has made yet another policy error and should have cut in July or earlier. This Fed is fundamentally flawed as its policy framework is overly rigid with a 2% inflation target utilizing the distorted PCE Core price index, which includes an archaic methodology to calculate owners' equivalent rent.

JB: What are the implications of this delayed move?

JH: The market is trading as if the Fed's policy error will lead to a recession. We believe that the market is ignoring the fact that the bond market has done the Fed's job by lowering the 10-year rate by over 80 basis points.

This reduction will translate into lower mortgage rates, which is likely to stabilize the housing market. Declines in housing investment have caused all 12 post WWII recessions. We currently are near all-time lows in housing inventory with about 1.8 million homes available for sale, versus over 4 million during the great recession.

JB: How many Fed rate cuts do you expect this year and why?

JH: We are forecasting three rate cuts this year but no 50-basis-point cuts as the market is implying. This Fed has been a terrible forecaster of inflation and the economy, which will cause it to move cautiously.

We are forecasting that long-term rates continue to decline in response to global central bank rate cuts and that interest sensitive sectors such as dividend stocks and preferred stocks will continue to outperform. 

JB: What are your thoughts on the Fed’s dual mandate of managing inflation and employment?

JH: The Fed learned all the wrong lessons from the inflation of the 1970's. The Fed believes that start-and-stop monetary policy was the issue when over 80% of the inflation of the ‘70's came from a horrendous 1,200% increase in oil prices.

Consequently, the Fed is way too focused on inflation as a risk even when it is close to its 2% target. Chairman Jerome Powell constantly states that inflation is a greater risk than a recession, which is not true when inflation is below 4%.

The Fed should make its inflation target more flexible and institute an employment target that includes job growth and stable unemployment targets.

JB: Do you think the Fed can navigate this economy around a recession?

JH: The U.S. economy has a number of advantages globally including ultra-low natural gas and electricity prices, global technology leadership, competitive corporate tax rates, a robust capital market, a flexible labor market and a resilient housing market.

Even this flawed Fed is not likely to be able to drive the resilient U.S. economy into a recession given these advantages.