Industrial investment: severe recession will force the Fed to cut interest rates by 100 basis points in one go

Jeffrey Sherman, deputy chief investment officer at DoubleLine Capital, warns:Markets should brace for a deep recession in the U.S. economy, which would result in the Federal Reserve slashing interest rates by 100 basis points。

This is a bold forecast based on weak economic data.Sherman believes the United States could enter a recession next yearMoney markets are already betting that the Fed will cut rates by a total of 130 basis points in 2024, but Sherman believes policymakers will eventually slow down and then have to implement the biggest rate cut since the outbreak of the epidemic.

Sherman said in an interview:

"Many of the economic indicators we are watching are giving warning or recession signals. By the time they cut rates, rates will be down by 100 basis points."

Sherman is preparing for this outcome by seeking the safety of long-term government bonds.He is buying 10-year and 30-year Treasury bondsEven if the Federal Reserve raises interest rates further this week, there is no problem, as he expects long-term Treasury yields to have peaked.

The Federal Reserve's recession indicator is near a 40-year high

The yield on the 10-year Treasury is currently around 3.9%, having fallen after breaching 4% several times over the past year as markets struggle over when global central banks will end their sharpest interest rate tightening cycle in decades. Short-term Treasury yields are still much higher, and this reversal has historically been a sign of recession, and Sherman is not taking it lightly. He said:

"The bond market is telling the Fed that they've over-tightened and they're going to have to cut rates, but the Fed may be cutting rates a little too late, maybe in an emergency meeting.Societe Generale InvestmentThe idea that the Fed will cut rates by 25 or 50 basis points to solve everything will not become a reality. "