The notion this is the year for core elements of the US economy (consumers spending on credit and buying new homes) to reassert themselves sufficiently to drive overall growth far enough above trend to meaningfully raise inflation is, in our view, a notion too far – even though this is the FOMC baseline forecast. There are simply too many key secular counter-forces, many of which are responsible for pushing the neutral real interest rate down towards zero, to allow the economy to suddenly revert to its mean behavior of the past 50 or so years after 6.5 years of sub-par recovery and the Fed having begun to raise short-term rates.
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