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Forecaster Views on the Overheating Hypothesis

Summary:
Earlier in the year, one fear was that excessive fiscal stimulus would push up inflation, push up long term yields. Professional forecasters don’t seem to view that outcome as imminent. Figure 1: Ten year constant maturity Treasury yields (black), CBO (red), Administration (blue), Survey of Professional Forecasters August (teal), and WSJ July (gray x). WSJ rates pertain to end-of-quarter. Dates in graph pertain to forecast finalization of forecasts. Source: CBO An Update to the Budget and Economic Outlook (July), FY2022 Budget (June), Philadelphia Fed SPF (August), WSJ survey (July).  Since these are different forecasts, it’s difficult to see how expectations have changed. I show the last two SPF and WSJ forecasts in Figure 2. Figure 1: Ten year constant maturity Treasury yields

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Earlier in the year, one fear was that excessive fiscal stimulus would push up inflation, push up long term yields. Professional forecasters don’t seem to view that outcome as imminent.

Forecaster Views on the Overheating Hypothesis

Figure 1: Ten year constant maturity Treasury yields (black), CBO (red), Administration (blue), Survey of Professional Forecasters August (teal), and WSJ July (gray x). WSJ rates pertain to end-of-quarter. Dates in graph pertain to forecast finalization of forecasts. Source: CBO An Update to the Budget and Economic Outlook (July), FY2022 Budget (June), Philadelphia Fed SPF (August), WSJ survey (July). 

Since these are different forecasts, it’s difficult to see how expectations have changed. I show the last two SPF and WSJ forecasts in Figure 2.

Forecaster Views on the Overheating Hypothesis

Figure 1: Ten year constant maturity Treasury yields (black), Survey of Professional Forecasters August (bold teal), May (light teal), and WSJ July (large gray x), and WSJ April (small gray x).  WSJ rates pertain to end-of-quarter. Source:  Philadelphia Fed SPF (August, May), WSJ survey (July, April). 

Long term yield projections have shifted down as prospects for economic activity have dimmed  (so that real rates have declined), and market-based inflation fears have abated.

The inflation surge is still forecasted to be transitory, as discussed in this post.

Today, Goldman Sachs marked down its Q3 forecast, from a previous 9% (SAAR) to 5.5% (while upping Q4 by a ppt), based mostly on the impact of the delta variant, and partly to supply chain (East Asia, Chinese port, semiconductors) impacts.

Menzie Chinn
He is Professor of Public Affairs and Economics at the University of Wisconsin, Madison

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