One argument for maintaining tight monetary policy is inflationary pressures, but the question is whether it comes from a positive output gap or a cost-push shock (or expectation). A big question is how large the output gap is.
figure 1: GDP (black bold), SPF August median forecast (tan), GDO (blue), GDP+ (teal), GDPNow at 9/1 (red squares), and potential GDP (gray), all in billions . 2012 Quarter Annual Growth Rate $ . Source: BEA 2023Q2 Release 2, Philadelphia Fed (GDP+), Philadelphia Fed (SPF), atlanta fedCBO, and author’s calculations.
Note that when using reported GDP, the output gap as of Q2 was -0.6%. Using GDPNow as of September 1 (5.6% seasonally adjusted quarterly) would put the output gap in the third quarter at essentially zero. On the other hand, GDO (probably more reliable than eventual revised GDP) is -1.6% in 2Q23 (GDP+ is -2.1%).
If the output gap is currently negative, the case for continued tightening is weak. Even more so, even if reported GDP is accurate, if the median SPF is correct, and over time, the output gap will become increasingly negative.
These calculations rely on estimates of potential GDP. On this point, there is some disagreement. For example, CBO’s output gap as a share of potential GDP is 1.2 percentage points lower than OECD’s by 2022 (June 2023) economic outlook). The forecast for 2023 is down 1.1 percentage points. Reliance on OECD estimates means there is a better case for tighter monetary policy.
For comparison, Q2 2023 CBO gap is -0.6 percentage points, HP bias is 0.3 percentage points, and Hamilton filter is 0.6 percentage points.
