David Rosenberg, a top American economist and President of Rosenberg Research, stated in his latest report on Thursday that the Federal Reserve's interest rate forecasts are sending a warning signal of an impending recession.
"The Federal Reserve does not want to explicitly state this, but it is actually saying that an economic recession is likely to hit us," he wrote.
Although the Federal Reserve optimistically predicts a GDP growth rate of 2.1% and an unemployment rate of 4% this year, Rosenberg believes that officials' predictions of a significant median decline in the federal funds rate next year are an indicator of economic recession.
According to the Federal Reserve's estimate, the median federal funds rate will be lowered by 150 basis points to 3.875% by 2025, and further by 225 basis points to 3.125% by the end of 2026.
Rosenberg stated that in past economic soft landings, the Federal Reserve typically lowered interest rates by 75 basis points, as seen in 1987, 1995, 1998, and 2019. The only exception was from September 1984 to August 1986, when the federal funds rate experienced a greater reduction due to a 60% drop in oil prices.
He wrote, "Except for that incident, any post World War II federal funds rate cut close to 150 basis points (i.e. 2025 forecast) is only due to one thing... (recession strikes)"
As the Federal Reserve turns to take action to deal with the expected economic recession, Rosenberg warns stock market investors to be cautious about the upcoming series of interest rate cuts.
"In an economic recession, interest rates, bond yields, and stock prices all fall simultaneously," he said.
Finally, he also reminded investors of the risks in the leveraged loan market, especially in the current era where the shadow of economic recession is deepening.
"The current default rate is on the rise, with the default rate exceeding 6%, which is twice the average level since 1997, and is rapidly approaching the level that triggered economic recessions in 2001, 2008, and 2020," he added.