The US equity market has responded positively to the Federal Reserve initiating an easing cycle with a 50bps cut. Markets forecasts point to another 200bps reduction in rates through to the end of 2025. This has helped the FT Wilshire 5000 index establish a new record high.
Exhibit 1: Consensus expects a larger decline in rates than the Fed by the end of 2025.
… but the justification for easing is their forecast that US Nominal GDP growth is heading back to secular stagnation levels
The latest Fed economic forecasts see the US returning to a 4.2% Nominal GDP growth rate next year. This is the trajectory of growth that the US economy encountered in the post GFC period and became known as secular stagnation.
Exhibit 2: Back to the post GFC growth levels
Unlikely to see a return to the Financial Repression of the 2009 – 2020 period?
A key driver of risk appetite in the period of secular stagnation was the delivery of Financial Repression and super accommodative monetary policy by the Federal Reserve. We show in Exhibit 3 that in the period of secular stagnation the Fed held rates at an average level of 75bps and expanded the balance sheet by $2tn. By contrast the Fed forecasts rates ending 2025 at 340bps and the balance sheet (QT) to contract by $1.1tn.
This indicates that 2025 will not repeat the secular stagnation playbook.
Exhibit 3: A comparison of monetary policy positioning – no return to the old normal
Source: Wilshire Indexes and FactSet and Federal Reserve. Data as of September 20, 2024.
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