Will Somebody Please Tell Me Again Why the Federal Reserve Has Embarked on a Tightening Cycle?

Real Gross Domestic Product Growth Personal Consumption Expenditures Excluding Food and Energy Chain Type Price Index FRED St Louis Fed

With 2017Q1 real GDP growth currently forecast at a 1.2% annual rate—down from 2.7% expected last December—it is worth pausing to remember that if that number comes true:

  • 4Q real GDP growth is: 2.0%/year
  • 8Q real GDP growth is: 1.9%/year

Maybe this is an economy in which slow productivity growth is constraining expansion. But if that is the case, where is the inflation? More likely this is the case in which overly-tight fiscal and monetary policy are constraining an economy that still has some significant amount of macroeconomic slack in it…

Plus: this is what you would expect from a central bank that regards 2.0%/year core PCE inflation as a ceiling not to be crossed, rather than as a central-tendency target…

March 22, 2017


Brad DeLong
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