In a brief summary of Moddy’s analysis:
- We are revising up our outlook for real GDP growth this year to nearly 7% and to over 5% next year. If we are right, and there’s good reasons to believe we will be, this will be the strongest two years of growth since 1950-1951 at the height of the post-World War II economic boom.
On inflation and the Fed:
- Inflation is picking up.
- Spiking commodity and industrial prices should also settle down later this year as the supply-side of those markets rebound and scrambled supply chains are straightened out. Having said this, inflation is unlikely to moderate as much as Fed Chairman Jerome Powell seems to be suggesting
- labor markets remain tight and wage growth strong
- Inflation expectations remain anchored, which assuages concerns that inflation will become undesirably high, but inflation appears set to accelerate more quickly than the Fed seems to think.
The median forecast of the federal funds rate by members of the central bank’s Federal Open Market Committee puts the first rate hike after 2023.
- we expect them to accelerate their plans for the first rate hike as it becomes clear that inflation will be higher much sooner than they anticipate. Indeed, we expect Powell to begin preparing financial markets for a tapering of the Fed’s quantitative easing (bond-buying) program once it is certain the U.S. has achieved herd immunity, which we anticipate by the late July meeting of the FOMC. The actual tapering of QE will begin with the committee’s January 2022.