Rate cuts coming – structurally strong economy and low inflation overcome short term economic issues

[ Paul & Peter, 7/11/24, New York Times, “Is America Getting Interest Rates Wrong?”, https://www.nytimes.com/2024/06/11/opinion/interest-rates.html, accessed 7/14/2024, LR]

Krugman: Even though recent inflation data has diminished my worries on that front and I would support rate cuts, I’m kind of surprised to be not all that dovish. If you had argued against cuts, though, I probably would have pressed the case for them, just to keep things interesting.

But let me talk about the short run, then the long run.

In the short run, that G.D.P. slowdown in the first quarter appears to have been just a temporary inventory effect; final demand was still growing fast, and many trackers are projecting second-quarter growth nearing 3 percent, which is still quite hot. Right now we seem to be in a place where you can choose numbers to rationalize whatever you want to believe: The economy may still be chugging along or at the start of a slowdown, and people I normally trust are on all sides of the issue.

One thing I’m fairly sure about is that the acceleration in inflation we’ve all been talking about was mainly statistical noise. So that’s a case for cuts.

In the longer run, our current era of low unemployment, relatively high mortgage interest rates and high stock prices reminds me of the late 1990s. And you can make a case that the current economy bears some resemblance to that era. We have a big tech boom and a lot of investment in green energy. Productivity may — may — be picking up. I used to believe that interest rates would stay low because of a stagnant working-age population, but a sudden jump in immigration has changed that picture, at least for a little while.

All that said, my guess is that interest rates will come down substantially once everyone is convinced that the inflation episode is over. But maybe not back to where they were prepandemic.