Salient to Investors:

  • The economy resembles the 1970s more than the 1990s.
  • Alan Blinder at Princeton sees risk of the economy moving in the same direction as it did after 1973, though we are a long way from seeing a sustained rise in inflation. Blinder said the long-term trend in productivity growth is what is important in determining the inflation outlook.
  • Stephen Stanley at Pierpoint Securities said June’s drop in the unemployment rate to an almost 6-year low highlights the dilemma facing the Fed: slower productivity growth is causing joblessness to fall faster than the Fed expected while GDP is rising more slowly than expected. Stanley expects the Fed to raise interest rates in June 2015.
  • Martin Feldstein at Harvard sees rising inflation and expects the Fed to respond too weakly, too slowly.
  • Joe LaVorgna at Deutsche Bank Securities sees long-term interest rates going a lot higher, with the 10-yr T-yield hitting 4 percent, as price pressures intensify and the Fed’s response lags.
  • Michael Feroli at JPMorgan Chase said the Fed’s model recognizes that unexpected changes in productivity growth can affect inflation, so the question is whether this impacts their decisions on interest rates. Feroli expects the Fed to raise interest rates in Q3 2015 because the Fed’s mandate is not strong productivity growth, but full employment and price stability. Feroli said the economy’s cruising speed is 1.75 percent or lower, versus the Fed’s projection of 2.1 percent to 2.3 percent.
  • Charles Plosser at FRB of Philadelphia is not worried about short-term inflation, but dislikes Yellen’s emphasis on wage growth, which is a lagging indicator of inflation.

Read the full article at

Click here  to receive free and immediate email alerts of the latest forecasts.