September 15, 2023
GDP growth for the second quarter was 2.1% . Third quarter growth seems to be homing in on about 3.5%. The economy seems to have more positive momentum than anticipated. We now expect GDP and growth for the year to be 2.3% in 2023 even though the Fed continues to push rates higher because the economy continues to create jobs, wages keep rising,
Given the GDP forecast above, we expect the unemployment rate to remain be 3.7% at the end of this year. With slightly slower GDP growth in the first half of next year the unemployment rate may edge upwards to 3.8%.
Given the rapid increase in money supply growth, the core CPI inflation rate rose 5.7% in 2021. It now seems likely that the core inflation rate will slow to 4.0% in 2023. Slower inflation but still not even close to the Fed’s 2.0% objective. Once the economy slows in the first half of 2024 the core CPI should slide to 3.0% by the end of that year.
We expect the funds rate to rise to 5.75% by yearend. For the first time in four years the real funds rate would be positive 1.8% (5.75% funds rate less 4.0% inflation) which would finally give the Fed a chance to slow the economy enough to reduce inflation and bring it closer to the 2.0% target. We expect a real funds rate of that magnitude will cause the economy to slow markedly to 1.0% in the first half of 2024, but then rise more rapidly in the final two quarters of that year as the Fed begins to gradually lower the funds rate.