The Fed’s Forecasting Record and a Warning of a Looming Recession

Jeremy Grantham, co-founder of GMO and a seasoned stock-market bear, dismisses the Federal Reserve’s ability to predict recessions. In a recent interview with Bloomberg, Grantham expressed his belief that the central bank’s aggressive monetary tightening would lead to deflationary effects and ultimately plunge the economy into a recession later this year or in 2024.

According to Grantham, the Fed has never accurately predicted a recession, especially those that followed major market bubbles. While they took credit for the positive impact of inflated asset prices on the economy, they never acknowledged the deflationary consequences when these prices eventually collapsed.

Despite the resilience seen in the U.S. economy over the past few months, Grantham emphasized that a recession is still likely to occur. He predicts that it will last well into next year and will be accompanied by a decline in stock prices.

Grantham has a history of issuing bearish predictions. Last year, he warned of an impending “super bubble” in stocks, and his forecast proved accurate as the S&P 500 experienced a significant downturn. However, it’s worth noting that Grantham has also made similar pessimistic calls following the 2008 financial crisis, which did not materialize as expected.

While U.S. stocks have performed remarkably well in 2023, particularly in the technology sector, there has been a recent pullback. The S&P 500 index has retraced approximately 5% from its July peak, though it is still up about 14% for the year. In contrast, the Dow Jones Industrial Average has only gained 4.2%, and the Nasdaq Composite has soared over 27% during the same period.

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