Quarterly Economic Outlook

The future trend in inflation is the single most important variable in the economic and investment outlook. The outlook for inflation is predicated upon the growth rate in aggregate spending and output relative to the underlying potential for noninflationary growth, estimated at 2%. Sustained economic expansion in excess of 2% will exert upward pressure on inflation. I continue to believe that a return to the Fed’s 2% inflation target is extremely unlikely, absent a recession. There is no change in my forecast that core inflation will range between 3% and 3.5% for the remainder of this year and could approach 4% in 2025. My forecast also assumes that real GDP will increase at a 2.5% rate over the next year, only slightly below the average 2.9% growth of the past year.

The probability of an outright recession during the next year is minimal, absent an exogenous shock. The Federal Reserve is eager to cut policy rates but will likely be patient in the context of a healthy economy and labor market. My forecast assumes rate cuts in September and December of this year, lowering the federal funds target from 5.5% to 5%. The economy does not require additional monetary stimulus, in my judgment. The implication is that any further easing in monetary conditions by the FOMC will result in an overheated economy in 2025, with rising inflation and long-term interest rates. A highly expansionary fiscal policy will also support economic growth and raise the risks of inflation and rising long-term interest rates... READ MORE

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