BPN Feed

Now central banks are looking at a decade of normalization. Many people expect that once we start to see signs of increased unemployment, the Fed will cut rates dramatically and take us back to quantitative easing. I don’t expect that to happen. The normal or neutral rate of interest is probably higher than the Fed or any of us anticipate. The new normal will be like the old, old normal: When the economy slows, the Fed can probably cut rates from 5%-5.5% to a little less than 3%, but not much below that.

I worry about overextrapolating trends. That’s a theme I thought about coming into this meeting. In 2021, we had an epic peaking in conditions, such as zero to negative interest rates and ample liquidity, that made things perfect for the overextrapolation of secular growth. Now we may be over-extrapolating inflation dynamics and forgetting about a lot of long-term trends that are deflationary. Scott made some important points about demographics. Negative demographic trends, high debt, wealth inequality, and the productivity of technology haven’t gone away. They have merely taken a back seat because of all the stimulus jammed into the economy during the Covid pandemic in 2020.