Halister News

(Bloomberg) -- Fed is attempting to raise rates with U.S. economy “extremely” vulnerable to shock and under conditions that may magnify impact of its policy moves, Hoisington Investment Management’s Van R. Hoisington, Lacy Hunt say in quarterly report.

• Fed has “a well-established pattern” over past century of tightening cycles that go too far or last too long, leading to recession and often to financial crisis, and eventually to a trough in bond yields; the current cycle “will not end any differently”
• Current cycle is unfolding under several conditions “that were not present in past cycles and that may magnify the current restraining actions of the Federal Reserve”; they include:
  • Deteriorating U.S. economy, with last year’s growth in nominal GDP worse than any of Fed’s 14 prior tightening cycles, along with weak population growth
  • Record debt on business, govt balance sheets
  • Unprecedented Fed balance sheet and larger cash and liquidity requirements mandated by Dodd-Frank
  • Declining monetary and credit aggregates
• Nominal GDP growth seen at 2% or less this year, along with “considerably slower” inflation and lower long-term Treasury yields, even if the Fed raises rates further; “recessionary conditions may lie ahead”
  • Pent-up demand from prior downturn has been exhausted
• Fed has initiated 15 tightening cycles since 1945; recessions followed in 80% of the prior 14 episodes
• NOTE: Hoisington manages $3.7b, including Wasatch-Hoisington U.S. Treasury Fund (6.1% avg annual return over 3 years)