he consensus on Wall Street remains that the US economy grew by about 2.5 percent in 2015 and will expand at a similar rate this year.
Following the Federal Open Market Committee’s Dec. 16 meeting, Federal Reserve Chairwoman Janet Yellen called for US gross domestic product (GDP) to grow by 2.4 percent in 2016.
According to the Fed, weakness in the US inflation rate stems primarily from temporary factors, such as the severe downdraft in energy prices; policymakers expect a 1.4 percent inflation rate in 2016, within 600 basis points of the central bank’s long-term target.
The Fed’s latest economic projections also include a median forecast of 1.4 percent for the federal funds rate at the end of 2016—a significant bump from the current range of 0.25 percent to 0.5 percent.
We regard this view as hopelessly optimistic. If economic data continue to disappoint, the Federal Reserve will need to pause its tightening campaign, potentially before year-end. Depending on the extent of the deterioration in US economic conditions, the central bank could be forced to cut rates in 2017.
The latest update to the Institute for Supply Management’s monthly Purchasing Managers Index (PMI) highlights the slowdown underway in the manufacturing portion of the US economy. Last month’s reading came in at 48.2, the lowest level since June 2009. Recall that PMI readings less than 50 correspond with a contraction in activity.