At the dawn of the Trump era, Ray Dalio urged people not to get too worried about the flabby orange Id in the Oval Office, pick up a copy of The Fountainhead and just let things unfold. The things started unfolding and the Wizard of Westport began rigorously testing the idea that maybe having Donald Trump as president was bad, and that maybe there would be consequences. Like, perhaps, a recession that would further sunder our already fraying social ties, one that was more likely than not, according to Ray’s Principled analysis.
Now, however, Ray’s breathing a bit easier. That’s in part because the radically non-radically transparent Fed raised interest rates higher than it should have, and also scared the bejesus out of people. This means that the central bank’s got a little wiggle room, and also has helped make things bad enough that a socially apocalyptic recession is now only a slightly better than one-in-three chance.
The markets weakened and Fed officials now see that the economy and inflation are weak there has been a shift to an easier stance by the Fed…. For these reasons, while I still expect that there will be a significant slowing of growth in the US and most other countries, I have lowered my odds of a US recession coming prior to the US presidential election to about 35%. More specifically, the Fed now has both a) the power to lower interest rates by 2+% and to pick up QE and b) the willingness to do that if needed to prevent a recession….
In summary while the Fed probably doesn’t have enough firepower to offset a deep recession, the big sag that we expect is probably manageable.