Economic growth through the first quarter of this year has been patchy, or as Fed Chair Janet Yellen once again referred to it in her extremely dovish speech “somewhat mixed.” After seven years of such ‘mixed’ growth, it should not be a complete surprise, yet many economists and some members of the FOMC each year continue to overestimate economic growth, only to have their hopes dashed and forecasts revised downward. Estimates since the start of the year for 2016’s real GDP have already come down from 2.5% to 2.1%, and now the latest Atlanta Fed GDPNow forecast for the first quarter suggests that this will likely have to fall further still. As Yellen’s speech made clear this week, we are still stuck in an environment of low and moderate economic growth, where it is extremely difficult for economies to raise both inflation and interest rates. It also means that the possibility of any “Great Divergence” (with respect to global monetary policy), as Governor Lael Brainard recently testified, would likewise seem to be particularly difficult. In this week’s Economics Weekly, we discuss the Fed’s recent record on forward guidance, and part 1 of the trends in corporate profit margins and what implications these might have for equity investors.
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Richard de Chazal, CFA is a London-based macroeconomist covering the U.S. economy and financial markets