SF Fed warns of contraction in H1’12

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The SF Fed’s most recent letter warns that there is an ~50% chance of a US recession in H1’12. The main reason I can think of to doubt this is that the cyclical sectors are so beat up they cannot fall much.

With the probability of recession elevated, I suspect we will see QE3 at the conclusion of the next Fed meeting (Dec 13). It also makes a Dec RBA easing (-25bps to 4.25%) seem sure.


  1. They are saying this on the back of Europe tanking. good article and interesting.

    Like your thoughts on Swanny’s strategy. Even tighter fiscal policy and lower interest rates.

    so just before the next election we see a surplus and lower rates.

    Only problem is you can tighten too much and hen have a deficit!!

  2. Ricardo, what do you think of this criticism of the SF Fed’s analysis by Eric Falkenstein?

    Also, what exactly are you predicting re QE3 at the next Fed meeting? An explicit reference to scope for further QE or an actual policy announcement? I would be surprised if they announced QE3 outright unless the November ISM Manufacturing PMI goes sub-50 (which it might).

    Would love to see a big rate cut cycle for reasons of personal self-interest. Would also be keen to see if Chris Joye sticks to his nudie run threat or weasels out of it.

    1. I love eric’s blog, but think he is wrong on this one. These aren’t overfit results, they are the sort of output you get if you estimate a probit model. Most of the time you are certainly not in recession, sometimes you certainly are, and we only spend a bit of time in between.

      I doubt Chris will run. And i think there will be balance sheet expansion at one of the next two meetings. I would lose my 100 bet with you.

      Sent from my iPad

  3. This is interesting because my view is that if I am to win the bet, it will likely be before QE3 is announced unless the initial amount of purchases is small and/or the recession turns out to be severe. My view is based on the Sumnerian reasoning that (in addition to the fact that the Fed is always late) aggressive easing will tend to push up yields in expectation of stronger economic conditions ahead rather than causing yields to fall. Looking back at QE1, I see that the collapse in the 10-year yield from 3.82 to 2.07 occurred between 13 Nov and 18 Dec 2008. QE1 was announced on 25 Nov, by which time yields had already hit 3.14. And QE1 did not include any purchases of Treasuries before 18 March 2009. You could argue that an expectation of MBS purchases caused a portfolio effect that benefited Treasury prices in late 2008, but I think it more likely that people were just buying bonds in Nov 2008 because they thought we were going into a depression. I see that Treasury yields did fall half a percent on 18 March 2009 when the Fed announced a doubling of QE1 including $300bn of Treasuries. But yields by then were already well up from their late 2008 lows. QE2 was similar – yields had nearly hit their lows by the time Bernanke hinted at QE2 on 27 Aug 2010.

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