The trader is We still expect short-term interest rates to fall sharply That’s because they, like Federal Reserve officials and many other analysts, believe that the post-pandemic economy will more or less resemble the world of 2019.
That may prove to be true, but the data so far suggest that we remain in a period of structurally faster growth, much like the late 1990s, or perhaps the late 1960s. continuing. Importantly, a welcome (but temporary?) slowdown in inflation do not have There has been a corresponding slowdown in growth in nominal incomes, but this has instead manifested as a sharp increase in productivity and real output. Therefore, under these circumstances, the combination of interest rates necessary to create an appropriate balance of financial conditions may be higher than the interest rates currently priced in.
I still laugh when I see this Bloomberg News headline. From October 17, 2022:
US economic recession forecast by the end of 2020 reaches 100% due to blow to Biden
This isn’t just a forecast, it’s the official forecast of Bloomberg’s in-house economics team, staffed by veterans of the Federal Reserve and other respectable institutions.
A new model forecast from Bloomberg Economics makes a U.S. recession virtually certain over the next 12 months, dealing a blow to President Joe Biden’s economic message ahead of November’s midterm elections.
recent recession probabilistic model Bloomberg economists Anna Wong and Eliza Winger predict that the likelihood of a recession will increase in all time periods, with a 100% recession forecast for the 12 months ending in October 2023. .
The reality turned out to be different.Not only did the U.S. avoid a recession in 2023, but the inflation-adjusted value of goods and services produced in the U.S. increased by more than 3%Growth would have been even better if the UAW, SAG-AFTRA, and WGA strikes hadn’t temporarily derailed auto and media production.Although subject to change, the Atlanta Fed’s current estimates are that the U.S. economy will Continue to grow at 3% annually until at least Q1 2024— and that may be conservative Considering the recent housing construction boom.
Bloomberg may have been the worst, but it wasn’t the only one that missed the forecast. At the end of 2022, Fed officials expect the U.S. economy to Growth rate in 2023 will remain at 0.5% “Under appropriate monetary policy.” According to a poll conducted by experts, Survey of professional forecasters Production is expected to increase by approximately 0.9% during 2023.
Why was everyone so pessimistic? By definition, Undesirable price increases in 2021-2022 reflect discrepancies The relationship between the amount of money and credit people spend on goods and services compared to the ability of businesses to meet demand. There were three The basic method to resolve these discrepancies is as follows:
Consumers can shift their spending to mix Percentage of goods and services purchased in a way that reduces stress in the most stressed departments
Consumers may reduce their overall spending, reduce the amount of goods and services they purchase, and free up space in the economy as a whole.
Companies can overcome any problems holding back production relative to demand and increase output.
The mistake was believing that the middle option was the only viable option. That belief led many to conclude that someone would have to do it. Power Americans will inevitably need to curb spending, which flows toward corporate sales, profits, investment, employment, wages, etc. until the pressure to increase prices subsides. The Fed kept monetary conditions appropriately tight throughout much of 2022, but the result was a hit to consumer spending, business investment, and especially the housing market.
But then things reversed.