2024-01-04 08:25:03
The U.S. economy continued to defy tight monetary policy in 2023, with real gross domestic product jumping to 5.2% in the third quarter, leading us to raise our 2023 real GDP forecast.
However, we still expect that higher interest rates, tight monetary policy, and tight lending restrictions will take a toll on the economy.
We believe that the economic growth rate began to slow in the fourth quarter of 2023 and will continue to slow until it bottoms out in the third quarter of 2024.
From there, a more accommodating monetary policy will allow economic growth to recover steadily.
Projected annualized real GDP in the United States
Source: Morningstar
Overall and core consumer price index figures remained on a downward trend in 2023.
We continue to forecast that inflation will continue to slow in 2024 and into 2025.
According to our projections, key drivers of high inflation, such as supply chain bottlenecks, shortages and other disruptions, will continue to resolve, causing deflationary pressure.
Our forecasts are lower than the consensus. They forecast that inflation will fall below the Fed’s 2% inflation target in 2025 before starting to rise slightly.
Expected inflation rate in the United States
Source: Morningstar
As we expected, the Federal Reserve held the federal funds rate steady at its December meeting.
We previously indicated that we expected the July hike to be the last interest rate hike of this monetary policy tightening cycle.
This cycle of monetary tightening was the most pronounced and rapid in the last 40 years, but far less restrictive than the policy of the 1970s and 1980s.
Even though the economy has weathered this tightening cycle better than expected, we still expect the rate of economic growth to slow through most of 2024.
We expect the combination of slowing economic growth and falling inflation to prompt the Fed to begin easing monetary policy and lowering the federal funds rate, perhaps as soon as March 2024.
We forecast six interest rate cuts during this period, double the Fed’s current projection.
US Interest Rate Forecast
Source: Morningstar
© Morningstar, 2024 – The information contained herein is for educational purposes and provided for informational purposes ONLY. It is not intended and should not be considered as an invitation or encouragement to buy or sell the securities mentioned. Any comments are the opinion of the author and should not be considered a personalized recommendation. The information in this document should not be the sole source for making an investment decision. Be sure to contact a financial advisor or financial professional before making any investment decisions.
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