For this reason, our interest-rate forecast includes the expectation that these rates will stay lower for longer. In other words, the natural rate of interest has shifted downward because of demographics and slower productivity growth, among other factors.

Our interest-rate forecast isn’t just driven by the Fed, but by broader long-term forces that act to push down interest rates in the U.S. Interest-Rate Forecast: What We See for the Future Worries about inflation broadening out into the rest of the economy (including via high wage growth) look overblown. This includes energy, autos, and other durables.Ĭombining these factors with monetary policy tightening, we expect inflation to undershoot 2% in 20. While consensus has greatly given up on the 'transitory' story for inflation, we still think most of the sources of today's high inflation will abate (and even unwind in impact) over the next few years. Bond market breakevens imply a similar view as consensus on inflation. On inflation, our views diverge sharply from consensus after 2022. The downward revisions to our GDP forecast, shown on the chart below, also mean a more negative output gap in the near term than we expected, which will cool off inflation further. We're still expecting inflation to come down dramatically in 2023 and later years as supply constraints are resolved. Our inflation forecasts for 2022 have edged higher, as supply disruptions now look to be taking somewhat longer to resolve than previously expected. Inflation Forecast 2022: Staying Hotter for Longer Than Expected

Increases to our GDP growth forecasts for 2025-26 partially make up for our downward revisions for 2022-23. Resolution of supply constraints should facilitate an acceleration in growth without inflation becoming a concern again. Altogether since the start of the year, our near-term GDP forecasts have come down substantially owing to supply shocks (especially the war in Ukraine) and a heightened determination from the Fed to fight inflation with tighter monetary policy.Īs shown below, we expect GDP growth will bounce back starting in 2024 as the Fed pivots to easing. Since our last update, we've slightly lowered our near-term GDP forecasts. We Expect a More Delayed Recovery, but a More Bullish Long-Run GDP Lower rates in 20 will be needed to improve housing affordability and thereby resuscitate demand in the housing market. Housing, which is the most interest-rate-sensitive major component of the GDP, will drive much of the fluctuation in GDP growth. If inflation becomes much more entrenched, the Fed will have to engineer a sharp short-run recession by hiking interest rates much higher than we expect.Īs long as the Fed is allowed to shift to easing in 2023, GDP should continue trending upward and then accelerate in 20. The inflation analysis is critical to our near-term projections for GDP and interest rates. In fact, we think the Fed will overshoot its goal with inflation averaging 1.4% over 2023-26. This will make the Fed's job of curtailing inflation much easier. We project price pressures to swing from inflationary to deflationary by 2023, owing greatly to the unwinding of price spikes caused by supply constraints in durables, energy, and other areas. We do, however, expect rates to dip below these levels in 20 as monetary policy leans accommodative. Further out, our 2026 and long-run projection for the fed-funds rate and 10-year Treasury yield are 1.75% and 2.75%, respectively. We project a year-end 2023 federal-funds rate of 1.75%, compared with 3.25% for the consensus.

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