Interview, Other
Reflation Risk
- U.S. GDP growth is projected at approximately 8% year-over-year for the current year, with super strong growth expected in the first half of next year before returning to trend in the second half.
- The U.S. economy is anticipated to reach or slightly exceed full resource utilization next year, whereas other advanced and emerging economies are expected to remain below full utilization through 2022 and potentially 2023.
- Inflation is forecast to eventually rise slightly above the 2% target without dramatic overshooting, driven by growth acceleration and recovery dynamics rather than overheating in the U.S. or other regions.
- Fiscal support is estimated at 11% of GDP for 2021, declining to 5% of GDP in fiscal 2022, with a significant portion of the $350 billion in state and local aid not expected for near-term spending.
- Tapering is expected to commence in early 2022, followed by a potential first rate hike in early 2024, though risks exist for an earlier liftoff in mid-2023 or a delay of one to three years if the recovery is disrupted.
- Monetary policy is expected to be responsive to stronger-than-forecast growth, employment, and inflation, with potential rate hikes of 100 basis points or more annually if the funds rate outlook tilts hawkish.
- Bond yields are anticipated to rise reflecting growth and inflation pressures, which may cause temporary equity market volatility despite real yields currently remaining 40 to 50 basis points from becoming a significant obstacle.
- Central banks are expected to require clear evidence of sustained inflation and full employment before withdrawing stimulus, with an unanchoring of inflation expectations deemed unlikely to surprise policymakers as in the 1960s and 70s.
- Investors anticipate a shift in focus from growth momentum to longevity as the horizon extends, with rates moving higher in a normal recovery profile and the market potentially reacting more aggressively than policymakers if inflation or growth views become less bullish.
- The primary risks include a limited chance of earlier rate liftoff, the possibility of a delayed stimulus withdrawal timeline, and portfolio challenges arising from market complacency regarding the permanence of low real rates.