Economic Forecasting Methods

🇺🇸 Moody’s Downgrades U.S. Credit Rating: What It Means for Markets & the Economy The U.S. just lost its last AAA credit rating. Moody’s downgraded the nation to Aa1, citing rising debt, deficits, and political gridlock. Here’s what you need to know: Why This Matters: ✅ First Time in History: The U.S. no longer holds a triple-A rating (AAA) from any of the big three agencies (S&P 2011, Fitch 2023, Moody’s now). ✅ Debt Crisis Warning: Moody’s projects U.S. deficits will hit 9% of GDP by 2035 (vs. 6.4% today) due to: - Soaring interest payments - Entitlement spending (Social Security, Medicare) - Weak revenue growth ✅ Market Reaction: 10-year Treasury yields rose to 4.49% — signaling higher borrowing costs ahead. The Root of the Problem: 1️⃣ Unsustainable Fiscal Path - U.S. debt-to-GDP is ~120% and rising - Trump’s proposed tax cuts could add $4.2 Trillion+ to deficits - No credible plan to control spending 2️⃣ Higher for Longer Rates - Fed policy + sovereign rating downgrade = more expensive debt rollovers - Interest costs alone could hit $1.6 Trillion /year by 2033 Market & Economic Implications: 🔸 Treasuries Under Pressure: If demand weakens, US treasury yields could spike further. 🔸 Corporate & Mortgage Rates: Higher treasury benchmark yields drive corporate and mortgage borrowing costs higher. 🚨 The Bigger Risk: This isn’t just about Trump or Biden—it’s a structural crisis decades in the making. Without major reforms, the U.S. could face a debt spiral that becomes difficult to control (higher rates → bigger deficits → more downgrades). Krishank Parekh | LinkedIn

Real yields continue to climb as nominal interest rates increase while core PCE inflation decreases. This dual pressure has caused real yields to rise over 300 basis points in the past 12 months. Real yields are far more important than nominal yields in judging whether interest rates are restrictive or not. To illustrate this, consider the fact that a 4% nominal interest rate in a 7% core inflation world would encourage further borrowing rather than restrict it. As core inflation continues its downward trajectory, real rates in the United States will likely get even higher - and hence more restrictive. There is a scenario in which the Federal Reserve may have to begin cutting interest rates - not to be accommodative - but simply to avoid becoming more restrictive in real terms than they already are.

Goldman Sachs Asset Management Fixed income musings Market Movements ➡️ Bond yields across advanced economies have risen despite central bank rate cuts ➡️10-year government bond yields have drifted higher since December Fed meeting ➡️Movement has been steady rather than sudden, reflecting economic fundamentals Key Drivers ➡️Upward revisions to US growth forecasts due to strong economic signals ➡️Higher inflation forecasts due to tariffs and economic strength ➡️Fed guidance for slower easing pace (two cuts vs four projected) ➡️Fiscal position concerns affecting long-term yields ➡️Technical factors like high bond supply early in year ➡️Country-specific issues (e.g., UK stagflation fears) Investment Implications ➡️Fixed income spread sectors remain resilient ➡️Focus on fundamentals as economy deviates from historical patterns ➡️Expect volatility from US policy changes under Trump administration ➡️Global opportunities exist outside US markets Need to stay agile and adjust exposures based on evolving dynamics Central Bank Outlook ➡️Fed: Expected rate 3.75-4% by end-2025 ➡️ECB: Moving toward 1.5% terminal rate ➡️BoE: Multiple cuts expected, targeting 3.5% ➡️BoJ: Further hikes likely, reaching 1% by end-2025

Even with the uncertainty surrounding the economic policy outlook, the US economy strides into 2025 with robust momentum, in contrast to the weaker outlook in other major economies. The tariffs threatened by the new administration would be poor policy, but are unlikely to cause major damage to US growth or inflation. Mass deportations of workers seem logistically impractical and therefore perhaps unlikely. At the same time, deregulation and low taxes will give further support to growth.   Stronger growth implies that further disinflation progress will be even slower, and the Fed has acknowledged as much. In fact, the Fed seems willing to live with above-target inflation for longer rather than jeopardize a robust growth outlook.   As we close 2024, both the Fed and market expectations have largely converged to my long-held call: I’ve been arguing that the “neutral” policy rate is around 4%. We are currently at 4.25%-4.5%, and we might see only one more 25 basis-point rate cut next year. The Fed pencils in only two more cuts for the next 12 months, and Fed Chair Powell acknowledged that the policy rate is closer to neutral.   Uncertainty means that we should once again brace for volatility. An active investment strategy strongly grounded on fundamental analysis remains the best approach to this economic and financial environment. #yearaheadoutlook #fixedincome #investmentstrategy #interestrates #fed #monetarypolicy #inflation #economy

Powell is Wrong About Why Mortgage Rates Have Increased. At the news conference following last week’s meeting of the Federal Reserve, a reporter asked Fed Chair Jerome Powell why mortgage rates have increased by a full percentage point to about 7% since the Fed cut its target rate in September 2024. Powell answered, “So, as you know, as we’ve reduced our policy rate 100 basis points, longer rates have gone up, not because of expectations—not principally because of expectations about our policy or about inflation; it’s more a term premium story.” A close look at recent history shows that Powell is wrong. The Fed’s misguided easing last September is the likely culprit in explaining the jump in mortgage rates. Mortgage rates closely follow the rate on 10-year U.S. Treasury securities and that is why Powell blames the rate increase on “a term structure story.” He is referring to the term structure of interest rates, often called the yield curve, which is the relationship between yields on long-term securities like the 10-year Treasury bond versus yields on shorter-term securities like the 2-year Treasury. Long term rates tend to be averages of current and expected future short-term rates plus a risk premium reflecting the greater price volatility of longer-term securities. The capital uncertainty of long-term bonds usually creates a premium to long-term interest rates over short-term rates but not always.  If expected future short-term rates are much lower than the current short-term rate the term premium can be negative. And that is how it was in the U.S. between July 2022 and September 2024. The term premium (tens minus twos) was negative by an average of 47 basis points from July 1, 2022 until September 17, 2024, reflecting an expectation that the Fed’s tight monetary policy would cause a recession and lower inflation. But that changed after the Federal Reserve lowered its target rate by ½ percentage point on September 18, 2024. The term premium since then has averaged plus 18 basis points. It would be a remarkable coincidence if the shift to a positive term premium after September 17, 2024, were, in Chair Powell’s words, “unrelated to our policy.” Mortgage rates have increased by about a full percentage point since September 2024 because the 10-year Treasury rate has increased by a similar amount. And the jump in the ten-year Treasury most likely reflects the Fed’s premature easing back then and increased inflationary expectations. Good luck, Bill Silber, February 2, 2025, 4pm. #economy #interestrates #investments  

The government is 'crowding out' the private sector: Kathryn Rooney Vera StoneX chief market strategist Kathryn Rooney Vera discusses the importance of cutting federal spending on 'Making Money.' January 09, 2025 The U.S. economy faces a mounting challenge: interest payments on debt now exceed defense spending, doubling as a percentage of GDP in just two years. This alarming trend reflects a structural shift in the economy, where government borrowing increasingly competes with private sector investment, dampening productivity, innovation, and long-term economic growth. Here’s what I shared on Fox Business with Taylor Riggs: 📉 Persistent fiscal deficits combined with the end of the global savings glut are driving bond yields higher. High bond yields not only pressure equity valuations via discounted cash flow models but also raise the hurdle rate for corporate investments, delaying critical projects and stifling growth. This dynamic is particularly severe for high-growth tech stocks, which are highly sensitive to interest rates. 💡 Equity investors should recalibrate strategies toward sectors that historically perform well in high-interest-rate environments: real estate and utilities offer defensiveness, while energy, industrials, and banks stand to benefit from ongoing economic strength. Additionally, a potential shift in policy under a Trump administration could provide further tailwinds for financials and energy, which typically benefit from deregulation and pro-business policies. Bond investors should be more averse to long duration given the likely continued rise in term premia. 📊 Corporate profits are facing headwinds from a combination of sticky inflation, higher financing costs, and global economic uncertainties. The government’s high deficit-to-GDP ratio of 6.5% limits the ability to implement meaningful tax cuts or spending reductions without further destabilizing the market. This crowding out effect underscores the urgent need for policymakers to address structural fiscal imbalances. The interplay between fiscal policy, rising bond yields, and market valuations creates a challenging environment that demands vigilance and adaptability. As we navigate this evolving landscape, strategic sector rotation will be essential for staying ahead. 📺 Watch the replay. https://lnkd.in/eeg-M_hf #MarketInsights #Investing #Economy #FiscalPolicy #Strategy #EquityMarkets

In my latest piece for Business Insider I explained that we're entering a new economic super cycle. The post-financial crisis era was characterized by low rates, the risk of deflation, slow growth, and a soaring stock market. But that's changing dramatically. Our new era features higher interest rates, the risk of inflation, faster growth, and a change in money-flows across the globe. Higher government debt is creating more demand for loans, pushing up interest rates. Older demographics have tightened the labor market. And pushback against globalization may also add to inflationary pressure. The new supercycle "puts the economy in a completely new era," says Silas Myers, the CEO of Mar Vista Investments, which oversees $4 billion in assets. He warns that an entire generation of investors, lenders, and entrepreneurs have failed to embrace the "profound impact" that the new economic era will have on their businesses. "We were in a time that was less demanding and more forgiving," Myers says. "But that time is ending." After the financial crisis, the Federal Reserve set interest rates at 0 to fight deflation and keep money flowing through the economy as quickly as possible. In more "normal" times, the Fed's benchmark is set at 2% — enough to keep money flowing, but not so fast that it causes inflation. That's called the neutral rate. Over at Vanguard, economist Josh Hirt thinks that, because of the macro changes in our economic environment, the neutral rate will settle at 3.5%. This has major implications for anyone trying to buy a house or start a business. For investors, it's a shift we haven't seen in a generation. It means a whole new set of asset classes and businesses will become more attractive, and the same old plays won't work anymore. That said, the US is equipped to handle this shift, especially if we remain stable enough to attract foreign investors and keep adding to our labor supply. "Not lost on investors is the fact that the US economy remains among the most competitive, innovative, and resilient in the world," Bank of America's Joe Quinlan wrote in a recent note to investors. "Aerospace or agriculture, energy or entertainment, transportation or technology, goods or services — pick any sector or activity, and there's a good chance the US leads the rest of the world. All of this has helped fuel demand among foreign investors for US securities of all stripes." https://lnkd.in/eaf7t2Ga

Contrary to most expectations, interest rates are rising on the long end of the curve since the Fed cut rates at its September meeting. While stocks continue their upward climb, the ten-year treasury note is up some 60 basis points, and 30-year home mortgage rates are back near 7%. So, what gives? Economic growth numbers have recently surprised to the upside, with employment data and retail sales, in particular, showing a continued strong consumer. Inflation continues to ebb, but core inflation remains a bit sticky, and recent strike settlements with port workers and Boeing machinists, while impacting a small number of workers directly, give an indication that we are still in a labor-constrained environment. Lastly, it is becoming clear that no matter who wins the election, fiscal deficits are going higher, meaning more borrowing and a higher supply of treasuries. We still expect short term rates to decline which will help some borrowers with indexes tied to the short end of the yield curve, but longer-term borrowers, like home buyers, might see less relief from lower rates.

🚨 Reality Check: Those Dreams of Lower Long-Term Interest Rates May Need a Wake-Up Call With the Atlanta Fed's latest GDPNow estimate showing Q3 2025 growth at a robust 3.1% (above historical averages) and inflation data showing persistent pressure as observed in the data https://lnkd.in/g6yuBB5b, it's time for a more robust understanding of interest rate expectations. The Economic Cocktail We're Facing: • GDP growth running significantly above trend • Core PCE inflation ticked up to 3.3% annualized for the month of July • AI-driven productivity gains creating both deflationary (efficiency) AND inflationary (demand) pressures • Labor markets remaining historically tight in spite of some recent job growth slowing • You need to understand the U.S. population demographics (aging of the Baby Boomers) before you start forecasting a surge in unemployment Why Lower Long-Term Rates May Be More Fantasy Than Forecast: 1️⃣ Strong Growth = Persistent Demand Pressure - When an economy is running this hot, it naturally creates upward pressure on prices and wages. 2️⃣ The AI Productivity Paradox - Yes, AI enhances productivity, but it also drives massive capital investment and creates new demand patterns that can be inflationary in the near term. 3️⃣ Fed's Dual Mandate Reality - With growth above trend and inflation showing stickiness around 3%, the Fed has limited room to ease aggressively. The Investment Implication: If you're building financial models or business cases predicting a return to the ultra-low rate environment of the 2010s, you might want to stress-test those assumptions. The "new normal" may look more like the pre-2008 era than the post-crisis decade. For Business Leaders: Plan for a higher-for-longer rate environment. Focus on productivity investments that generate real returns, not just those dependent on cheap capital. The markets that thrive in this environment won't be those waiting for rate relief—they'll be those that adapt to and capitalize on sustained economic strength. #Economics #InterestRates #Inflation #BusinessStrategy #MacroEconomics #AI #Productivity GDPNow link... https://lnkd.in/gwQQ6rzd

Strong demand is still the primary engine behind US inflation. That matters more to tech and AI than most people realize. The latest Apollo Global Management, Inc. analysis by Torsten Slok highlights a clear signal from the San Francisco Fed: inflation remains demand driven, not supply constrained. When consumer and enterprise demand keep price growth elevated above the 2 percent target, the Fed has no choice but to hold rates higher for longer. Why this matters for our world: Sustained higher rates reshape the capital allocation model for AI, cloud, and infrastructure. Data center expansion, long term GPU contracts, power procurement, and even balance sheet strategies all get repriced. Persistent demand pull inflation also means AI cost curves do not compress as quickly as many expect, which reinforces the need for disciplined scaling and clear ROI paths. I see a lot of leaders betting on a rapid rate pivot. This chart suggests we need a more pragmatic scenario plan. If demand pull inflation remains the dominant story, capital intensive sectors need to build with resilience at the center. The full analysis is worth reading: https://lnkd.in/gjKHHbJG #Macroeconomics #Inflation #FederalReserve #InterestRates #AIInfrastructure #DataCenters #CloudComputing #Semiconductors #Leadership #Strategy #TechInsights