Interview, Fireside Chat
Are inflation fears overblown? The outlook for inflation, US growth, and long-term rates
- U.S. core PCE inflation is expected to decline from 2.9% at year-end 2023 to 2.5% by the end of 2024, driven by the cessation of catch-up effects in car insurance and housing, though it will not immediately reach the 2% target.
- Shelter inflation is projected to decline further as official government data lags behind leading indicators, while pandemic-era supply shortages will exert a disinflationary impact far exceeding potential inflationary pressure from labor market tightening.
- U.S. real GDP growth is forecast to reach 2.5% on a Q4-Q4 basis in 2024, roughly one percentage point above consensus, supported by expected immigration running above trend and a completed or near-completed recovery in labor force participation.
- The potential U.S. GDP growth rate is estimated at approximately 2.1%, primarily fueled by faster labor supply growth, while easing financial conditions are anticipated to add several tenths of a percentage point to current-year growth.
- A projected drop in the unemployment rate to 2.9% is expected to raise core inflation by only about five basis points, based on the slope of the Phillips curve.
- The Federal Reserve is anticipated to implement two interest rate cuts in the current year, with the first scheduled for July, provided inflation data remains cooperative, though the final target rate level remains uncertain.
- The long-run neutral interest rate is estimated to be structurally higher at 3% to 3.5%, compared to the previous cycle's 2.5%, due to sustained high budget deficits that could add 1% to 1.5% to the short-run neutral rate.
- Market pricing of long-term rates may influence a Federal Reserve reevaluation of the neutral rate over the next year or two, with the speaker noting that investors often adjust structural parameter views more quickly than central banks.
- Risks include market participants incorrectly assuming economic resilience at high rates implies low-rate headwinds are permanent, and the current environment of elevated interest rates and deficits being unsustainable indefinitely.
- Predicting inflation direction for the current year is expected to be easier than usual due to predictable catch-up dynamics and the reversal of shortages.