Editor's Note: Jimmy Zhu is chief strategist at Fullerton Research. The article reflects the author's opinions, and not necessarily the views of CGTN.

The International Monetary Fund (IMF) upgraded the forecast for U.S. growth for this year despite a universal downgrade. However, such upgrade is seen as contradicting in the eyes of Wall Street traders, who are increasingly predicting a U.S. recession in the near future while questioning the policy effectiveness of the Federal Reserve (Fed).

The Fund upgraded the U.S. growth forecast to 2.6 percent from 2.3 percent previously, based on the stronger-than-expected first-quarter GDP. At the same time, the IMF further downgraded the global growth this year to 3.2 percent, the lowest since the global financial crisis in 2009. The upgrade of the U.S. growth forecasts and downgrade on the global scale are contradicting each other.

U.S. growth set for slowdown

The strong first-quarter U.S. growth is mainly due to its improving trade balance in this period, but it has been fading since the beginning of the second quarter due to slower global growth. It set for hurting the U.S. economy moving forward as its export revenues start shrinking.

With less revenue from the exports portion and fiscal support, U.S. growth is likely to face increasing downward pressure in the second half of the year.

U.S. stocks traders not optimistic

On Wall Street, stocks and bonds traders are preparing for a U.S. recession. Although U.S. stocks rose to a historic high in July, traders don’t show much confidence in domestic U.S. growth.

The S&P 500 gained 21 percent since the beginning of the year, but its more domestic-focused Russell 2000 only rose 16 percent in the same period.

Data shows that around half of the S&P 500 companies’ revenues are generated outside the U.S., while the Russell 2000 Index primarily focuses on the domestic market. Such pricing in the U.S. stocks market shows that traders are more pessimistic about the future development of the domestic economy if stocks price is a reliable indicator for future economic performance.

Also, those smaller-sized companies are more growth-oriented. Thus their stock prices reflect more accurately the growth outlook of the U.S. economy. Once the investors do not feel confident about future growth, they usually tend to dump those stocks before the recession arrives.

Russell 2000 companies are susceptible to interest rate changes as well. When the Fed hiked the interest rates by four times in 2018, the Russell 2000 Index went down by 13 percent in this period.

However, expectations on the Fed to cut the rates start increasing since late May. The Russell 2000 Index only gained 6 percent, versus a 9 percent rise of the S&P 500. Such a result reflects that investors still question the effectiveness of the Fed’s monetary easing.

Bond traders call for crisis management tool

For now, Powell’s monetary policy outlook remains unclear after a 25-bps rate cut in late July. If the policy confusion continues, it will cause a delay in business activities in the main street.

Even if the Fed is to commit to more policy easing in the coming month, how effectively those rate cuts will transmit into the real economy is doubtful. Many developed economies around the world have been cutting interest rates aggressively in the past years, but their economies’ outlook has seen little improvement.

The latest pickup in the U.S. labor market and its core CPI data suggest that the Fed’s easing is not necessary for now, but bond traders insist on a rate cut.

While the job market and inflation have yet to show clear signs of deterioration, interest rate moves mainly reflect the traders’ pessimistic outlook on the future U.S. economy.

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