Prominent American economists acknowledged that their previous view that prices would not be controlled without a recession was wrong, and generally agreed that the possibility of a soft landing for the U.S. economy rather than falling into a recession this year has increased.
Some scholars expressed self-reflection, saying that it was a mistake to predict the economy by mechanically applying existing economic models in a pandemic situation that occurs about once every 100 years. According to reports from US economic media such as the Wall Street Journal (WSJ) and Bloomberg on the 7th, economists from major US universities and research institutes discussed the US economic situation and outlook at the annual meeting of the American Economic Association (AEA) held in San Antonio, Texas on the 5th to 7th.
The diagnosis was made like this. The participating scholars had to admit that their previous economic forecasts were wrong as the inflation rate slowed without causing a recession in 2023. This is because at the annual general meeting held in Orlando, Florida in January of last year, a year ago, many scholars diagnosed that an economic recession was inevitable to slow inflation.
In fact, personal consumption expenditures (PCE) prices, which the U.S. Federal Reserve uses as a standard for monetary policy, rose 2.6% compared to the previous year as of November last year, slowing to a level that is not far from the Fed’s 2% inflation rate target.
Professor James Hines of the University of Michigan expressed his reflection, saying, “Since we did not properly understand why inflation soared in the first place, I think we should not be surprised that inflation slowed faster than expected.” Although attending scholars remained cautious about the outlook, they somewhat agreed that the U.S. economy was more likely to achieve the Federal Reserve’s 2% inflation target without suffering a recession.
“We have to be humble in our predictions because the (inflation) transition is difficult to predict,” said Emi Nakamura, a professor at the University of California, Berkeley, and winner of the John Bates Clark Medal, given to young economists under 40. “But at this point, it is very plausible.” “It’s a story,” he said. Although not as many as Wall Street experts expect an interest rate cut in the first half of this year, scholars generally agreed with the view that the Federal Reserve will cut interest rates as inflation slows.
Stanford University professor John Taylor predicted that the Federal Reserve’s base interest rate would fall to the 3-4% range, saying that if inflation continues to fall, “interest rates will also fall further.” Professor Taylor is famous as the scholar who created the famous ‘Taylor rule’ as a standard for judging the appropriate level of the central bank’s base interest rate. He strongly criticized the Federal Reserve for responding late to the rise in inflation in 2022.
It was also pointed out that the existing economic model related to inflation needs to be improved. Northwestern University professor Janice Everley, who was also mentioned as a candidate for Federal Reserve Vice Chair, pointed out that in the immediate aftermath of a very rare pandemic, over-reliance on computer economic models based on existing economic data led to too pessimistic judgments of the situation.
Additionally, although the supply chain shock that caused the inflation surge in 2021 was thought to be permanent, it turned out that it was not, Professor Aberly said. “The supply side of the economy is performing better than expected,” he said. “This is the most hopeful part of a soft-landing scenario because it means the economy can maintain strong growth without putting upward pressure on inflation.”