This contrasts with downgrading occurring in most other major economies. This is good news for the Biden administration running into the November election.
Exhibit 1: Changes to GDP forecasts across the regions
However we learned in 2023 that the Fed were uncomfortable with growth much above 2%
In Exhibit 2 we compare the trajectory of 2023 consensus GDP growth forecasts (red line) v the trajectory of 2024 forecasts (blue line). We know that, as the growth forecasts ratcheted higher in 2023 and broke past the 1.2% level, the Fed started to rein in market interest rate cut expectations with ‘higher for longer guidance’.
Are we seeing a repeat of this occurring in 2024?
Exhibit 2: 2024 GDP forecasts are retracing the 2023 profile
The Fed and markets now seen to agree on 75bps easing in 2024
Having been concerned that at the start of the year markets were pricing in c.150bps interest rate cuts in 2024 commencing in March, the Fed has guided the market to their view that there will possibly be a more modest 75bps interest rate cut during the latter half of the year.
The concern is that any further upgrading in growth expectations and maintenance of sticky services inflation could resurrect ‘higher for longer’ rhetoric.
In this regard, good news could well be seen as bad news for market risk appetite
Exhibit 3: Year End 2024 interest rate forecasts (blue) have been increasing of late
Source: Wilshire Indexes, LSEG Datastream, FactSet and Federal Reserve. Data as of March 20, 2024
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