Thursday, March 17, 2022

The miracle in current Fed forecasting - Raising rates but no real impact on GDP and unemployment


Tighter monetary policy means that negative real rates should be a thing of the past. Not so with current Fed thinking. The real rate of interest will be at least -2.4 based on their own forecasts.  The real rat should be at zero in 2023 and perhaps slightly positive in 2024. Of course, the current real Fed funds rate is twice what is expected for 2022. The negative real rate will support a GDP above long-term trend for this year and unemployment below the long-term level. 

This is the miracle forecast of tightening Fed policy but continued negative real rates which will allow for low unemployment, above trend growth and inflation that will fall later this year and continue to decline for the next two years. 

It is a beautiful economic world. No fall-out from the Ukraine Russia War, higher oil and commodity prices, supply congestion, or inflation. The political Fed does want to even suggest that higher rates to stop inflation may restrict aggregate demand. 

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