Economy, Unemployment, Inflation and
Stimulus: The Surprises

In January of the year, the Federal Reserve predicted that the U.S. economy would grow between 3.4% and 3.9% in 2011. In April, the Fed said it predicted that the economy would grow less, at between 3.1% and 3.3% this year. Yesterday, the Fed lowered its growth prediction for the U.S. for 2011 again, to between 2.7% and 2.9%. Is Michael the only one that sees a trend here? A trend of continuously lowering our growth prospects for 2011?In January of this year, the Federal Reserve predicted that the U.S. economy would grow between 3.4% and 3.9% in 2011. In April, the Fed said it predicted that the economy would grow less, at between 3.1% and 3.3% this year. Yesterday, the Fed lowered its growth prediction for the U.S. for 2011 again, to between 2.7% and 2.9%.

Am I the only one that sees a trend here? A trend of continuously lowering our growth prospects for 2011?

Also yesterday, after a two-day Fed Open Market Committee meeting, we got more of the same: interest rates will remain low for an “extended period” of time, inflation pressures will subside, the unemployment rate is high, but should move lower later this year, and the Fed’s QE2 program will end in June as scheduled.

I’m a big fan of Fed Chairman Ben Bernanke. He’s done a masterful job of saving America from the Great Depression II. But maybe we should look at the situation today from a different angle.

Interest rates, as measured by the Federal Funds Rate, have been between 25 basis points and zero since December 2008. According to Bloomberg, interest-rate futures indicate only a 20% chance that the Fed will raise interest rates by March 2012!

Can interest rates really remain that low for that long without spurring inflation? And isn’t it worrisome that 31 months of record-low short-term interest rates have not spurred the economy?

We’re all entitled to an opinion, right? So here’s my two cents’ worth:

The growth forecast for the U.S. economy will need to be lowered again later this year. Inflation will surprise on the upside. The unemployment rate in the U.S. will be higher at year-end than it is today. Another form of stimulus similar to QE2 will be needed. Long-term interest rates will rise, too.

Where the Market Stands; Where it’s Headed:

A bear market rally in stocks that started on March 9, 2009 continues to prevail.

For the year, the Dow Jones Industrial Average is up 4.6%. Yes, the stock market has been higher (actually peaking on May 2, 2011), but we’ve recently undergone a small correction in a 27-month bear market rally…a healthy correction for stocks.

Some bullishness has been released from the air, stock values have been realigned, corporate profits are still strong, and monetary policy is still very expansive.

I continue to believe that stock prices will move higher before Phase Three of the bear market sets in.

What He Said:

The year “2000 was a turning point of consumer confidence in high-tech stocks; 2006 will be remembered as the turning point of consumer confidence in the housing market. That means more for-sale signs going up, longer time periods to sell homes, bloated for-sale inventory and eventually lower prices for homes. But this time, the turnaround in consumer confidence will have a bigger impact on the economy. Hold onto your seats, this is going to be a nail biter.” Michael Lombardi in PROFIT CONFIDENTIAL, August 24, 2006. Michael started talking about and predicting the financial catastrophe we began experiencing in 2008 long before anyone else.