Guggenheim's Minerd says aggressive Fed moves can delay recession, but not avoid it

[September 18, 2019]    By Jennifer Ablan

NEW YORK (Reuters) - Guggenheim Partners global chief investment officer Scott Minerd warned on Tuesday the firm's recession forecast model showed a 58% chance of the economy being in a recession by mid-2020, and a 77% chance of one beginning in the next 24 months.

Minerd, who oversees more than $240 billion in assets under management, said history shows that once Guggenheim's Recession Probability Model reaches current levels, "aggressive policy action can delay recession, but not avoid it."

Minerd, in a research note to clients, said Guggenheim expects the Trump administration will continue to use easier monetary policy as a "green light for more aggressive trade policy."

He noted that Federal Reserve Chairman Jerome Powell explicitly cited trade policy as a rationale for cutting rates, which risks the development of a feedback loop between Fed rate cuts and trade war escalation.

Economists widely expect the U.S. central bank to cut its benchmark rate for the second time this year by 25 basis points to a range of 1.75% to 2.00% at a meeting ending Wednesday to counter risks posed by the U.S.-China trade war.

"If core inflation heads back up toward 2%, some Fed officials may more forcefully resist further rate cuts, complicating an already difficult messaging exercise," Minerd said.

"Incoming data support our longstanding baseline of a recession beginning by mid-2020, per our Recession Dashboard. Given that credit spreads are still relatively tight on a historical basis, we continue to believe it is prudent to remain up in quality as we await better opportunities to deploy capital in riskier credit sectors in the coming downturn."

Minerd said investors should keep a close eye on the stock market and the shape of the yield curve.

"Stock market response will be a key indicator of the success of the Fed's move to cut rates, and if the curve stays inverted the market is signaling its skepticism that Fed policy will keep the economy from falling into recession," he said.

(Editing by Jacqueline Wong)

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