America’s economic growth can slow down this year as the effects of Federal Reserve’s monetary-tightening policies continue to work through the economy, according to Nathan Sheets, Citi’s global chief economist.
“As the year progresses, we’re going to see some meaningful signs of slowing in the economy,” Mr. Sheets said in a March 1 interview with CNBC. The Citi economist thinks that some of the headwinds associated with the Fed’s monetary-tightening policies are still “working their way through the economy,” such as the restriction on bank credit. Whether these things will translate into a soft landing or a recession is “a very finely balanced debate.”
“Where I have conviction is it’s going to be slower,” he stated. “Our house view still leans toward a recession. But, you know what, the U.S. economy has surprised us and does have some resilience. So, soft landing is certainly a plausible outcome.”
When asked which of these two options is the bigger risk for the U.S. economy right now—the Fed implementing interest-rate cuts early and flaring inflation or the agency delaying rate cuts and subsequently risking recession—Mr. Sheets replied he sees a risk of the Federal Reserve moving “too soon toward the cuts.”
“They’ve seen very high inflation. They want to conquer that and bring it back down to their target. The slowing that I described, I think is almost inevitable. I think it may be unavoidable at this stage,” he stated. “I think for the Fed, bringing down inflation to 2 percent remains job one. And I think that’s appropriate.”
“The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent,” the FOMC said in a statement. January 2024 inflation came in at 3.1 percent, way above the two percent target.
Since March 2022, the Fed has raised interest rates 11 times. As a result, the rate is currently at a two-decade high of 5.25 percent. The upcoming Fed meeting is scheduled for March 19–20.
According to the CME FedWatch tool, only 3 percent of interest rate traders expect the Fed to reduce the rates to a range of 5.00–5.25 percent at the March meeting. An overwhelming 97 percent expect the agency to keep rates unchanged within a range of 5.25–5.50 percent.
GDP Growth and Fed Cuts
In addition to Mr. Sheets, other experts also foresee a slowing down of the U.S. economy this year. In January, Bank of America CEO Brian Moynihan made a similar forecast.The bank’s research team predicted “a slowdown in growth, a soft landing with 1 percent growth for the first three quarters of 2024,” he said during an interview with CNBCTV18. “But that’s down from almost a 5 percent growth rate in the third quarter of 2023. So it’s slowing down.”
In its 2024 economic outlook, JP Morgan forecast that the American economic growth “is likely to decelerate in 2024 as the effects of monetary policy take a broader toll and post-pandemic tailwinds fade.”
“After tracking to a better-than-expected 2.8 percent real GDP growth in 2023, we forecast a below-trend 0.7 percent pace of expansion in 2024,” it said in a report. “Among the major components of GDP, consumer spending is likely to rise at a more muted pace next year, while fiscal spending could swing from a positive contributor in 2023 to a modest drag.”
As for interest rates, JP Morgan expects the Fed to start implementing cuts of 25 basis points beginning June, bringing the interest rate to a range of 4.0–4.25 percent by the end of 2024.
A recent report by the Swiss Re institute paints a slightly better picture of the U.S. economy, predicting a growth rate of 2.2 percent this year.
“With disinflation making strong progress, we expect the Federal Reserve to kick-start a cautious easing cycle in the second quarter of this year. However, the strength of growth and upside risks to inflation render unlikely the rapid easing cycle that is being priced in futures markets,” it said. Swiss Re estimates the Fed could begin rate cuts as early as the May meeting.
Apollo Management’s chief economist, Torsten Slok, is expecting the Fed to “spend most of 2024 fighting inflation,” he wrote in a Friday note to clients, according to Bloomberg.
“The market came into 2023 expecting a recession. The market went into 2024 expecting six Fed cuts … The reality is that the U.S. economy is simply not slowing down, and the Fed pivot has provided a strong tailwind to growth since December.”
The Conference Board says it is “no longer” forecasting a recession hitting the American economy this year. However, it expects consumer spending to cool down and the GDP growth to slow down to below one percent in the second and third quarters.
“Thereafter, inflation and interest rates should normalize and quarterly annualized GDP growth should converge toward its potential of near 2 percent in 2025.”
