A time for tapering and a time for looking at interest rates
We are maintaining our 2021 full-year US GDP growth forecast at 6.5%, with growth strongest in Q2 due to a combination of the last round of federal cheques and the vaccination-driven reopening of the economy. However, Q2 GDP growth looks like coming in at around 8% growth (quarter over quarter SAAR) rather than the 10% previously expected. Still, US GDP in Q2-2021 should be bigger than in Q4 2019, before the pandemic. This would mark an important milestone in the US recovery.
The crucial macro question for the second half of the year and beyond is what happens to the nearly USD2,500 bn of US consumers’ ‘excess savings’. A look at data for consumer spending in April-May bears out our expectation that this savings pile would only be gradually spent is being borne out for not.
Our baseline growth scenario continues to include agreement on an infrastructure spending package—yet its impact on US growth could be modest. The infrastructure package currently going through Congress looks much diluted compared with the original Biden Administration proposals (the latest talks only allude to USD580 bn in new spending to be spread over several years).
Our 2021 annual core PCE inflation forecast remains at 2.4%. We still see current inflation pressure as temporary (mostly due to bottlenecks in industrial supply chains and temporary price spikes in some service niches). Nevertheless, there are upside risks to our inflation forecast due to rising rental prices, and some marginal pass-through from commodity prices, including the recent increase in oil prices.
We still think Fed chairman Jerome Powell could send a signal regarding the reduction of the Federal Reserve’s USD120 bn of monthly asset purchases at the Jackson Hole conference at end-August, although the ‘tapering’ of quantitative easing may not start until several weeks later. We have brought forward our prediction for the first hike in the federal funds rate to December 2023 from mid-2024 as the Fed seems to be growing more fearful about the inflation risk. Recognition of the need to curb rising asset prices, including house prices, also seems to be gaining traction in internal Fed debates.
However, in the longer run, we continue to think that the Fed will find it difficult to truly tighten monetary policy due to the high levels of public and private debt, as well as implicit constraints ranging from social priorities to the need to help foster ecological transition.