All about inflation

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.