The NGDP Futures Market Believes In The Great Stagnation

by: Scott Sumner

For several years I've been arguing that we are in a Great Stagnation, and that trend NGDP growth is about 3%, not the 5% to 5.5% from before the crisis. Just to be clear, I am referring to Tyler Cowen's supply-side theory, not the Summers/Krugman demand-side secular stagnation, which I do not accept.

The NGDP futures price in the Hypermind prediction market has fallen from the 4.0% to 4.5% range earlier in the year, to its current value of 3.6%. The 10 year bond yield has also been trending lower in recent weeks (although it's quite erratic.) You might argue that 3.6% is still higher than 3.0%, but that's the wrong way to think about it. The 3.6% forecast is for an expansion year, a year when the unemployment rate is expected to decline. The trend rate of growth includes both expansion years like 2015 and recession years like 2009, and the next recession. Thus if the nominal economy is expected to grow by 3.6% in an expansion year, the actual trend rate of growth is surely lower. My 3.0% estimate is probably not far off from market forecasts.

Some implications:

1. Very low nominal rates are the new normal, as I've been saying for many years.

2. The Fed policy regime is bankrupt, as it is based on interest rate targeting and growth rate targeting, a combination which simply doesn't work at the zero bound. They need to do NGDPLT.

3. The Fed needs to raise wage inflation to 3% to hit its 2% PCE inflation target. Although wage growth has accelerated a tiny bit in recent months, they are still at only 2.136% over 12 months, far below the wage growth required to hit their inflation target. (Of course I oppose inflation targeting, but if they are doing it then they should do it.)

4. While the Fed says they target 2% inflation and unemployment near the natural rate, their actions are not consistent with that target. They run low inflation during period of high unemployment, whereas their mandate calls for the exact opposite.

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