Interview, Fireside Chat, Conference Presentation
US Midyear Outlook: Geopolitical Shocks, the New Fed Era, and Growth
- Job growth has accelerated over the past four months, creating a labor market distinct from the start of the year and removing immediate concerns regarding labor market deterioration.
- The economy is expected to operate above the break-even job creation rate (50,000 to 60,000 jobs monthly) to maintain stable unemployment, with overall GDP growth forecast at approximately 2% for the year.
- Inflation is projected to trend sideways, stabilizing closer to 3% than 2% due to war effects, AI demand amplified by mismeasurement, and tariff impacts, though net of these factors, core inflation has remained near 2%.
- Sequential monthly inflation is anticipated to remain softer for the remainder of the year, contingent on oil prices staying at current levels, with significant war-related price impacts largely occurring in Q2 and expected to diminish in the third and fourth quarters.
- While Core PCE inflation is expected to remain around 20 basis points or slightly higher for the rest of the year, the probability of rate hikes is estimated at 25%, significantly lower than market expectations for two or three hikes.
- The Federal Reserve is expected to remain on hold at the July meeting and maintain rates throughout the current year, with the next potential rate cut not anticipated until 2027, as the Fed has limited patience for persistent high inflation regardless of source.
- Real income growth is expected to be mediocre in the back half of the year due to low saving rates and the exhaustion of tax refunds, leading to somewhat softer consumption growth, weak housing, and weak government spending.
- Despite softer consumption, business investment is forecast to show outsized strength, supported by a stock market wealth effect estimated to contribute three to four tenths of a percentage point to consumer spending.
- The war is identified as the primary upside risk and wildcard for inflation, with a potential threat that higher inflation resulting from the conflict could alter monetary policy and impact financial markets.
- Regarding balance sheet policy, there is little room for reverting to previous monetary systems, though some reduction via regulatory changes may occur, while the composition of assets remains an open question that will likely require Treasury adaptation without impacting interest rates.
- Future Fed communication is expected to include soft, non-committal forward guidance, with the potential elimination of median projections in the Summary of Economic Projections viewed as a minor change, whereas dispensing with the publication entirely is considered unlikely.
- Market volatility presents a risk where price movements could exceed the Fed's intentions, particularly if a policy change occurs without accompanying commentary on economic conditions.