NGDP Update, July 3 2017

The forecast has rebounded. Immediately following the Fed’s June 13 meeting, markets moved (overall) in a direction that indicated less NGDP growth. A few indicators have however turned up at the end of June, resulting in a rebound in the outlook to the high-point of the quarter.

Indicators that have rebounded include 5-year TIPS breakeven, the copper price, the Dollar index and the 5-year yield, which rose from 1.59 to 1.62. The 5-year yield increase suggests the market thinks the Fed will be able to keep rates up. What is notable is what hasn’t fall far from pre-rate-hike levels such as the S&P 500.  Oil prices are down, and weighing on the forecast as a result.

It’s conceivable that the forecasting system is misinterpreting the latest asset price movements. But it seems fair enough to say that, for now, the market´s take on the aggressive rate hike schedule is not as bad as it might have been.

Next week we will say good-bye to the 2018Q2 forecast, and begin looking at the 2018Q3 forecast. In the meantime, take note that inflation expectations are remarkably low, even if they’ve bounced back the last week. This will make it hard for the Fed to tack on further punitive rate increases in 2018.


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