Slow GDP growth and elevated inflation expectations
Source: Philadelphia Federal Reserve Bank of Philadelphia Survey of Professional Forecasters Q2 2023, as of May 12, 2023. Real GDP is a measure of grodd domestic produc adjusted for inflation.
- Investors continue to expect a Fed rate cut in the second half of this year despite repeated assertions from Fed policymakers that they have no such plans.
- Following the Fed meeting in early May, Chair Powell emphasized the Board’s commitment to bringing inflation back in line with the Fed’s 2% mandate.
- Since then, a wave of regional Fed Presidents (Richmond, Atlanta, Minneapolis) cast further doubt on the prospect of a pivot to lower rates, noting that little progress has been made on the inflation front.
- May’s 2Q 2023 Survey of Professional Forecasters released last week supports policymakers’ skepticism as economists increased their growth and inflation expectations from a quarter earlier. Overall, they continue to see slow but positive real economic growth while inflation remains well above the Fed’s target.
- Against this backdrop, markets sit in a challenged place today. Despite the possibility of a soft economic landing, the Fed may not come to the rescue with a rate cut as economic data remain resilient, consumer balance sheets healthy, labor markets strong and inflation elevated.
