In this article, I will discuss my prediction of what the Fed will do on Wednesday. I am writing this article before the announcement, but you may be reading it afterwards. It’s still valuable insight because it gives you an idea of where the Fed is in the monetary cycle. The three parts to discuss are the Fed’s decision on rates, it’s guidance for future changes in rates, and its guidance on what it will do to its balance sheet. The other aspect of the Fed’s presentations is its opinion on the state of the economy. Usually there’s nothing new on the economic front because it is simply rehashing publicly available data. I’m not knocking the Fed with that point because a lot of the data is there’s; the FRED website is very useful as I’ve used its charts in my posts many times.

One thing the Fed probably is aware of is the secular decline brick and mortar retail is in. The bright side of this situation is that weak retail sales doesn’t necessarily imply the economy is weak. However, it makes retail a black hole sector which hurts S&P 500 earnings. The decline in oil and the manufacturing downturn brought down earnings in 2015. It shows that the overall growth is weak enough that one sector can drag it into the negatives. In a previous article, I mentioned that historically online retail takes more share from brick and mortar stores prior to a recession because consumers are searching more studiously for the best deal which is usually online. This hypothesis is still in play although, for it to work this time, we’d need to see a recession quickly.

The chart below shows the large increase in expected bankruptcies in retail in Q1. You can see the increase in Q1 2016 which supported my hypothesis that a recession was coming. While it didn’t portend a recession in late-2016, it did signal more weakness to come for retail. I want you to ignore the estimate for Q1 U.S. GDP growth because Hedgeye’s GDP estimate for Q1 is far outside the reports we’ve seen thus far. On Wednesday, the Atlanta Fed will update its model which now shows 1.2% growth. I disagree with the title of this graph because retail is weak and the overall economy is weak. The signal isn’t as direct as last cycle, however, as there are more bankruptcies than in 2008, yet the economy isn’t in a major recession.