As 2024 unfolds, the US economy grapples with the persistent spectre of recession that has loomed for the past two years. However, the market may want this to happen because the Fed’s rate cut is more important than anything else.
Escaping this economic shadow proves challenging, given the lingering fears stemming from post-pandemic recovery, including high prices, tight monetary policies, and an unpredictable geopolitical landscape.
Although the US might avoid a recession next year, achieving escape velocity remains challenging. This difficulty prompts the Fed's plan to implement rate cuts in 2024.
The impact of fiscal stimulus wanes, coupled with the delayed effects of monetary tightening, signalling lower growth ahead and raising the possibility of a mild recession. For almost two years, the Fed has been working hard to slow down the strong $27.6 trillion US economy, and it has seen some success. Inflation, a key factor influencing central bank policy, has receded but still hovers around 3.2%, exceeding the 2% target.
Although the employment picture remains vigorous, with 2.5 million nonfarm payroll jobs added and a 3.7% unemployment rate, the pace has been much slower than those days in the pandemic period.
The hope of avoiding a hard landing and the Fed’s rate cuts
The S&P 500 closed 2023 with a 24% annual gain, reflecting optimism fuelled by disinflationary economic resilience data and a Fed shift towards potential rate cuts.
This optimism has turned many investors into tentative believers in a soft landing, favouring average stocks and small-caps over defensive mega-caps. Some caution against premature expectations of deep Fed rate cuts, suggesting that the indexes may be ahead of themselves. However, momentum is strong. Bulls choose to ignore the bears for now.
The outlook for the immediate future aligns with the belief that falling inflation can be favourable for stocks. Timely labour-market indicators show no significant decline in labour demand or wage growth, although consumer fatigue is emerging in certain areas.
Fed Chair Jerome Powell signals a potential rate cut in 2024, even if the economy holds up well. If inflation goes down, short-term rates above 5% might become more restrictive, requiring rate cuts during non-crisis periods.
While the Fed projects a potential 0.75 percentage points of cuts in 2024, the Fed funds futures market anticipates 1.25 percentage points, reflecting investor expectations and a perceived market need for such easing.
Fullerton Markets Research Team
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