Coincidentally, following our previous update, the FT just surveyed 42 academics on their US economic outlooks and views on Fed terminal rates. The key finding is that the academic economists expect the Fed to make additional rate hikes, whereas the Wall Street consensus does not.
Doesn't reveal much except a gradual shift to higher for longer narrative… and no recession.
The chart above doesn't convey much information, except that the “higher for longer” narrative gained prevalence throughout the year. The subsequent charts in the FT article on expectations of US economic activity are, perhaps, more interesting. Unfortunately, it would be improper for us to share additional charts from the article.
[Non-subscribers to the FT may wish to consider a 50% discounted promotion offer they're currently running.]
Are Wall Street or academic forecasters better?
Without more granularity on the data, we cannot say whether the FT group of academic forecasters is better or worse than the survey of 100+ Wall Street economists. If we are to make an educated guess, they are very likely to be much better than the bottom quartile of Wall Street economists polled. [Realistically, is the US chief economist of the 10th largest bank in Japan likely to have an edge or special insights? Or, are they more likely to take the top forecasters' figures and skew their own estimates up or down based on personal sentiments?]
The top 2/3 on Wall Street probably still have a slight edge and more resources
The top 2 or 3 forecasters on Wall Street are very likely to be more reliable than their academic counterparts. Not least because macro forecasting is their primary job. Some academics frequently rely on proprietary datasets produced by major Wall Street banks. As a general principle, we believe it's very difficult to outsmart the people responsible for the data, whether it concerns macroeconomic indicators, the transacting parties behind prices in a marketplace, or analyzing data on behalf of others that's outside our core expertise.
Getting Fed terminal rates wrong is more forgivable than expecting a recession with high certainty which does not materialize
It's worth noting that during the current tightening cycle, there were 2 waves of consensus upward revisions for Fed fund terminal rates. In part, it explains why Treasury yield curve inversion has persisted for longer than usual. Unlike flawed recession probabilities, we've never criticized anyone for failing to correctly anticipate central bank policy decisions in the distant future. The former was a case of flawed analysis and cognitive dissonance towards the current state of affairs. The latter required a crystal ball or placing blind faith in models that were already known to be unreliable.
More talk for stars to fit the data
The discussion on equilibrium/neutral interest rates (r*) is more likely motivated by those eager to fit recent empirical data to econometric models which have already proved unreliable. The same applies to the natural rate of unemployment (u*). It's down to basic maths and statistics, not economics. All they are saying is that we want to recalibrate our models to fit the new data. Less is the discussion about underlying economic conditions and structural changes.
At risk of losing credibility
So far, those who have kept an open mind and considered incoming data in its entirety have fared better than others trying to fit priors and models. At some point down the road, macroeconomic relationships could revert and align with model predictions. Then, those who advocated for tweaking model parameters to fit an unusual period will have lost serious credibility amongst their peers.
So… are more Fed rate hikes coming?
According to the economist survey by the FT, additional Fed hikes are an increasing possibility… Shhh, please keep quiet! The sharks are already circling the heavily pregnant whale. Swim straight, fast, and confidently, like you know where we're heading. Then, assuming nobody (significant) revises up their terminal Fed funds estimates, we might just pass by unscathed.
The less significant Wall Street economists may sense an opportunity here to jump ahead of the pack. If clients seek reasons for the upwards revision on terminal rates, just drop in a little something about r* and u* moved higher post-pandemic. That should end the discussion.
