Forecaster of the Month: Fed won’t push interest rates too high, award-winning forecaster says

Inflation is not getting out of control, which means the Federal Reserve won’t need to push interest rates so high that it will crash the economy, says Michelle Girard, chief U.S. economist for NatWest Markets and the captain of the winning team in the Forecaster of the Month contest for May.

“I’m the biggest hawk out there,” Girard said in an interview. (An inflation hawk is someone who favors aggressive and tight monetary policy to keep inflation at safe levels.)

“I just don’t see an inflation risk,” Girard said. “Inflation will remain relatively benign.”

After years of forecasting more interest-rate hikes than the consensus expected, “I have flipped. I have less Fed tightening than the Fed policy makers themselves,” she said.

The Federal Reserve is expected to raise rates Wednesday to a range of 1.75% to 2%. The announcement is scheduled for 2 p.m.

Also: Follow our live blog of Jerome Powell’s press conference.

“While we do not now see the fundamental case for the Fed to raise rates above neutral, the dot plot suggests that, among the FOMC, the need for monetary policy to ultimately turn restrictive is a widely held view,” Girard and her team of economists wrote in a note to clients.

The most recent Fed projections showed that most policy makers see a neutral federal-funds rate at just under 3%, but most of them expect that the Fed will hike rates to 3.4% in 2020 to keep inflation under wraps. Girard and her team think the Fed will stop when it gets to neutral, just short of 3%.

Unlike many other economists on the Street, the NatWest team — Girard, senior U.S. economist Kevin Cummins and Deepika Dayal — doesn’t see a recession looming. They don’t think the Fed will push rates so high that it will slow the economy. And they believe that the boost from tax cuts and deregulation won’t fade away.

“I would argue there’s a more lasting benefit,” Girard said. “Companies will have higher capital spending than otherwise.” As a result, gross domestic product will be higher, wages will be higher. and inflation will be benign.

The win in May was the third time Girard has won the monthly forecasting award as the chief economist, and it’s the 10th time the firm (in its several reincarnations from Greenwich Capital to RBS to NatWest) has won the title since MarketWatch began the award in 2003.

In May, out of 10 indicators we track, Girard, Cummins, and Dayal had the most accurate forecasts on five (new home sales, consumer price index, retail sales, industrial production, and consumer confidence). On four of them, their forecast was perfect.

Their forecast for durable goods orders was among the 10 most accurate.

NatWest’s forecasts Number as reported*
ISM 58.3% 57.3%
Nonfarm payrolls 205,000 164,000
Trade deficit No forecast -$49.0 billion
Retail sales 0.3% 0.3%
Industrial production 0.7% 0.7%
Consumer price index 0.2% 0.2%
Housing starts 1.300 million 1.287 million
Durable goods orders -1.5% -1.7%
Consumer confidence index 128.0 128.0
New home sales 660,000 662,000
*Subject to revision

In the past 12 months, NatWest ranks fourth among the 45 forecasting teams in our survey.

The runners-up in the May contest were Joerg Angelé of Raiffeisen Bank International, Michael Moran of Daiwa Capital Markets, Christophe Barraud of Market Securities, and Ryan Sweet of Moody’s Analytics.

The MarketWatch median consensus published in our Economic Calendar includes the predictions of the 15 forecasters who’ve earned the most points in our contest over the past 12 months, plus the forecast of the most recent winner of the monthly contest. When they differed, the MarketWatch consensus was more accurate than the closely followed Bloomberg consensus 65% of the time in 2017.

The top forecasters over the past year are Jim O’Sullivan of High Frequency Economics, Ryan Sweet of Moody’s Analytics, Joerg Angelé of Raiffeisen Bank International, Michelle Girard’s team at NatWest Markets, Christophe Barraud at Market Securities, Spencer Staples of EconAlpha, Gus Faucher at PNC Financial, Pat O’Hare of Briefing.com, Jan Hatzius’s team at Goldman Sachs, Richard Moody at Regions Financial, Michael Feroli at JPMorgan Chase, Douglas Porter’s team at BMO Capital Markets, Peter Morici of the University of Maryland (and a regular columnist for MarketWatch), Michelle Meyer’s team at Bank of America Merrill Lynch, and Paul Mortimer-Lee’s team at BNP Paribas.

Now read: Pimco says the next U.S. recession likely will be wok-shaped: shallower and longer

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