The US Economy started on a strong note in 2024, which is similar to its position at the end of 2023. As a result, investors have pushed the expectations of the Fed rate cuts further into the future. However, a strong economy will be an asset rather than a risk for the Federal Reserve’s rate-cut plans.
The December Forecasts by the Federal Reserve showed that there is real GDP growth for 2024 at the rate of 1.4%, and in the long term, they expect the economy to grow at 1.8%. These forecasts show that the growth is low compared to the 2.5% seen last year and below the potential for this year’s economy.
Wall Street forecasters are being cautious as the GDPNow forecast by the Atlanta Federal Reserve on Monday showed that the US economy might grow at 2.9% in the first quarter of 2024. According to some other Wall Street forecasts, these numbers are showing a growth closer to 1.8%.
The Possibility of Fed Rate Cuts
Neil Dutta, Renaissance Macro, recently wrote on Monday that the consensus view is leaning more towards stronger growth, and there has been a consistent increase in the “Blue Chip” forecasts since December. Dutta has gone on to suggest that the Street consensus needs to “wake up” about the growth outlook.
According to the latest data published by the Blue Chip Quarterly Consensus Forecast, the real GDP is expected to increase by not more than 2.1% annually until Q4 2025. Additionally, there is a possibility of slow growth between Q1 and Q2 of 2024.
Dutta said, “I am sorry, but these forecasts do not make any sense to me.” He believes that the expectations about consumption are too cautious. Moreover, the recent survey data and the higher stock prices show a possibility of increased business investment.
With inflation expectations staying as they are despite the recent high inflation figures, Dutta believes that the overall trend shows a slowdown in underlying inflation. He added that this will push the Federal Reserve to adjust the monetary policy.
Before the drastic high data of January had descended upon the country, there was a possibility of six Fed rate cuts happening in 2024, but now that has gone down to only three. Moreover, the December forecasts by the Federal Reserve have also shown that there might be only three rate cuts this year.
Dutta also said that monetary policy operates with a long and variable leg, and this means changes in policy by central banks like the Federal Reserve will take a much longer time to have effects on the economy.
According to economist Milton Friedman, this shows that the Federal Reserve and the other central banks are facing uncertainty. He said that the decisions on keeping the rates high or low and how long to keep it that way is something that needs to be done gradually and in small steps.
Jerome Powell, Chair of the Federal Reserve, recently said in his speech at Jackson Hole that using data like natural unemployment and interest rates might be simple, but in reality, it’s tough because these factors are always changing.
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