Chart of the week

Soft economic landing to challenge markets?

This week’s chart looks at recent forecasts for economic growth and inflation and why markets could be forced to muddle through a soft landing.

May 19, 2023

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.  

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