Chicago Booth experts gathered in January for the first of several Economic Outlook 2023 forums, offering insights as the world continues to emerge from the social and economic disruptions of the COVID-19 pandemic, with countries and companies struggling under a host of problems. These include the worst inflation and the highest interest rates in 40 years, shifts in supply chains and the labor force and the threats posed by climate change and ongoing geopolitical tensions.
This year’s panel consisted of Wenxin Du, professor of finance and a Fama Faculty Fellow; Randall S. Kroszner, the Norman R. Bobins Professor of Economics; and Raghuram G. Rajan, the Katherine Dusak Miller Distinguished Service Professor of Finance. The forum was moderated by Kathleen Hays, global economics and policy editor for Bloomberg Television and Radio. During opening remarks, the dean, Madhav V. Rajan, noted Booth’s 125th anniversary and highlighted Economic Outlook as a prime example of the school’s long history of informing public discourse.
The event—the first in-person Economic Outlook forum since the advent of COVID in 2020—was held at the Sheraton Hotel in downtown Chicago. Panelists weighed in on a wide range of topics, including the U.S. Federal Reserve Board’s efforts to tame inflation by raising interest rates, the chances of a rate cut, the state of markets as China loosens its COVID restrictions and the country reopens, and broad concerns heading into the new year.
How high will interest rates go?
“I’ve been saying for a while it will be mid-fives,” said Kroszner. “We’re still in a period where unemployment is at a 50-year low, and the Fed is waiting for the labor market to crack before pausing.”
Rajan agreed but added that wage growth has slowed and there is some evidence—especially in the tech sector—that layoffs are increasing. “The Fed is looking for signs that will allow it to slow down,” he said.
The reason the Fed is being so cautious is that it doesn’t want to be responsible for triggering a deep recession, Rajan added, “especially since Congress has just spent $6 trillion on the best recovery money can buy.”
Whether mid-fives will be enough remains to be seen. “I don’t think anyone knows,” said Rajan. “The Fed has certainly done enough to counter criticism that it is behind the curve. But beyond that, I think you have to be a little agnostic and admit that there’s a lot of unknowns, a lot of possibilities. The Fed’s biggest fear is if they pause or stop, people will start spending again and the whole problem will just repeat itself.”
The panelists generally agreed that there would likely be a mild recession toward the end of the year.
“The Fed has enough tools to keep the situation from getting out of control,” Du said.
Kroszner said that the Fed is hoping to achieve an “immaculate disinflation” that avoids both a recession and any increase in the unemployment rate. The problem, he said, is that “we’ve never seen that happen before and I don’t think it’s likely.”
Is there any chance of a rate cut?
The panelists as a group expressed doubts about the possibility of the board cutting rates. Riffing on a famous line from 1980 speech by Margaret Thatcher, Kroszner said, “The Fed is ‘not for turning,’ for pivoting.”
He added that “the last time inflation rates were this high was 40 years ago, and back then interest rates were in the double digits. People have lost context on this because it was two generations ago. But that is why Fed chairman Jerome Powell keeps referencing Paul Volcker and the importance of not pivoting too early.”
Rajan said that the reason the Fed is taking a hard stance on inflation is because it lacks credibility as an inflation fighter.
“We’re coming out of a period where inflation was very low and the Fed’s job was actually to get the inflation rate up,” he said. “Now the dynamic has changed and they have to convince the market that they mean what they say.”
There is one big asterisk, however. “If we’re clearly going into a recession and we start seeing big job losses, they may cut rates mildly,” Rajan said. “But probably not this year.”
How will the reopening of China affect global markets?
Among the range of opinions this question elicited, Du offered, “It’s going to take a while for the Chinese domestic market to come back, but when it does there will be strong pent-up demand.”
Rajan added, “As Chinese demand comes back, it’s going to put upward pressure on global commodity prices.” An example, he said, is natural gas. “Europe is currently benefiting from lower natural gas prices because the Chinese have not been competing. That will change in the next year.”
Kroszner, however, offered some hope on that front. “Germany recently built a liquified natural gas plant in six months. This would normally have taken three years. They did it by streamlining and eliminating a bunch of regulations. There’s a real lesson there that if you put your mind to it, you can really get things done.”
Kroszner also expressed doubts on the revival of the Chinese domestic market. “There has always been a very high personal savings rate in China because of a lack of trust in the government to provide healthcare and other services. The lesson people have learned from the pandemic is that this will continue. So, while the domestic market will definitely come back, it won’t snap back quite like the U.S. did.”
Upcoming Economic Outlook events
On Feb. 7, Kroszner will join Prof. Chang-Tai Hsieh for Economic Outlook in Hong Kong, a virtual event that will examine the economies of Asia. The series will conclude March 7, with a hybrid event in London hosted in partnership with UChicago’s Institute of Politics, featuring Kroszner and ISD cofounder and CEO Sasha Havlicek on how business leaders and policymakers will approach 2023. For more information, visit the Economic Outlook website.
—A version of this story was originally published on the University of Chicago Booth School of Business website.