Why might the FOMC not cut? The simplest reason is that inflation might not come down quite enough. Another possible reason is that even if it does, if GDP growth is above potential, the unemployment rate is pushing below its 50-year low, and financial conditions have eased further on enthusiasm about a soft landing, then stimulating an already-strong economy by cutting might seem like an unnecessary risk, especially with the memory of the recent inflation surge still fresh. In that scenario, the FOMC could say that the short-run neutral rate is higher than common estimates of the medium-run neutral rate, and as a result the monetary policy stance is actually not so restrictive and the need to cut is not so immediate. Related: What Have We Learned About the Neutral Rate? and The Evolution of Short-Run r* After The Pandemic and The Case for “Higher for Longer”: Prices are Disinflating, But Not Wages (Yet)
- Date Posted:
- August 11, 2023
Germany’s economy has eked out extremely low growth over the last 5 years—recent revisions to GDP data mean its output is once again barely above pre-pandemic levels, but that still means the country has seen less than 0.5% cumulative GDP growth since late-2018. German industrial investments have not recovered to pre-pandemic levels at a time when countries like the US are pouring record amounts of resources into factory construction and equipment purchases. Real German fixed investment in equipment remains below 2018 levels nearly 5 years later, despite a strong recovery in late 2022 and early 2023.