All about inflation All about inflation\images\insights\article\federal-reserves-street-small.jpg December 19 2023 January 3 2024

All about inflation

Three things to watch in 2024.

Published January 3 2024
My Content

The Fed Will the Federal Reserve match the market’s expectations for six rate cuts in 2024? If growth decelerates and inflation continues to march toward its 2% target, that’s a reasonable assumption. But if inflation stabilizes above that, policymakers may be hesitant to ease as much as the market anticipates. They want to avoid the mistakes of the 1970s, when they cut rates too soon and inflation reversed course, prolonging the country’s misery.

The economy Will the U.S. economy glide to a soft landing or finally succumb to the recession many economists have been predicting for some time? The former has happened in only four of the past 12 Fed hiking cycles, but the markets have embraced the scenario. The S&P 500 rose 20% in 2023, and corporate bond spreads tightened significantly. While GDP cruised along at a decent clip in 2023 as core CPI inflation fell from 9% to 4%, a number of recession indicators are flashing warning: the inverted yield curve, contraction in money supply, tightening of bank lending standards, 19 consecutive monthly declines in the LEI and consumer pessimism. Could all these signals be wrong? Is this time really different?

Inflation Will core CPI/PCE settle around 2%, or will they get stuck at 3% or even higher? The contraction in the money supply, healing of supply chains and drop in commodity prices all suggest they should decline, though when remains uncertain. But if the labor market stays hot and wage growth runs at a 4-5% pace, it’s possible that services price-pressures will remain too elevated. One note of caution: a study over multiple decades and across multiple countries revealed that, after a spike in inflation and subsequent softening, a second wave occurred 87% of the time.

Tags 2024 Outlook . Markets/Economy . Fixed Income . Interest Rates . Inflation .

Views are as of the date above and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector.

The Conference Board's Composite Index of Leading Economic Indicators is published monthly and is used to predict the direction of the economy's movements in the months to come.

Consumer Price Index (CPI): A measure of inflation at the retail level.

Gross Domestic Product (GDP) is a broad measure of the economy that measures the retail value of goods and services produced in a country.

Personal Consumption Expenditures Price Index (PCE): A measure of inflation at the consumer level.

S&P 500 Index: An unmanaged capitalization-weighted index of 500 stocks designated to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. Indexes are unmanaged and investments cannot be made in an index.

Federated Investment Management Company