It is widely expected that the Fed will lower its interest rate target in September. However, Fed chairman Powell insists that the decision will depend on the data. Suppose the Fed decides not to cut interest rates in September—what will that mean for growth prospects in the fourth quarter of 2024? Should that cause us to revise our forecasts, or should we raise the growth forecast?
Here the answer depends on whether you are making a conditional prediction, or an unconditional prediction. Let’s start with conditional predictions:
Let’s say that at the time of its September meeting, 12-month PCE inflation has been running at about 2.5% and the Atlanta Fed continues to forecast that 3rd quarter real GDP will grow by 2.8% (which is its current forecast. ) Under those conditions. , a Fed rate cut may lead to faster economic growth expectations than a decision not to cut rates.
Now let’s look at the unconditional weather forecast. Can I expect economic growth immediately after a rate cut, or after a decision not to cut rates? Probably the latter. This is because the Fed will only stop cutting rates in September if the economy shows more momentum than currently expected. A decision not to cut rates may indicate an unexpected change in the economic trajectory. If only I had known that the Fed would choose not to cut rates, I would have raised my GDP growth forecast for the 4th quarter.
This is one of the reasons why I don’t like to talk about interest rates. When I hear pundits predicting a rate cut in September, I’m not sure if they’re predicting about the future path of monetary policy, or the future path of the economy. I’d like them to tell me what kind of NGDP growth they expect over the next 12 months, but I’ve probably never seen this kind of forecast.
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