The U.S. economy has shown remarkable resilience, and experts suggest that it may avoid a recession if the Federal Reserve stops raising interest rates. However, the growth rate is expected to slow down in the coming year due to increased borrowing costs.
Prominent economists from major U.S.-based banks have projected that the gross domestic product (GDP) will decelerate to 1.2% in 2024, down from an estimated 2% this year, as higher rates begin to impact economic growth.
Despite this projection, economists are growing more optimistic that the Federal Reserve can achieve a rare and desirable outcome known as a “soft landing.” A soft landing refers to the Fed’s ability to raise interest rates sufficiently to curb inflation without causing a recession.
In the recent past, most economists believed that a recession was unavoidable. The Federal Reserve has accomplished a soft landing only once or twice throughout its history, making skepticism about its feasibility understandable.
Simona Mocuta, the chair of the economic advisory committee at the American Bankers Association, acknowledged the skepticism surrounding a soft landing. As the chief economist at State Street Global Advisors as well, she recognizes that advocating for such an outcome is advocating for something extraordinary.
Just eight months ago, this same group of economists predicted that growth would stagnate by 2023, bringing the U.S. dangerously close to a recession. However, they have since revised their forecasts.
The economists affiliated with the American Bankers Association attributed this revision to the robust labor market and the first increase in inflation-adjusted incomes after a few years of stagnation. These positive trends are expected to sustain consumer spending, which serves as the primary driver of the economy, and keep the U.S. on a growth trajectory.
Inflation and Interest Rates: An Economic Outlook
In recent times, there has been a significant easing of inflationary pressures, allowing the Federal Reserve (Fed) to reconsider its stance on interest rates. The prevailing sentiment suggests that the Fed may not only halt the rate hikes but also contemplate reducing them by up to 1 percentage point next year.
While acknowledging the progress made in combatting inflation, it is important to recognize that the battle is not yet won. Therefore, it is imperative for the Fed to maintain vigilance in this regard. Nevertheless, the majority of committee members believe that the tightening cycle has reached its conclusion.
As per the American Bankers Association (ABA) panel’s projections, the annual inflation rate, as measured by the consumer price index, is expected to slow down from the current level of 3.2% to 2.2% by 2024. A similar deceleration is anticipated for the Fed’s preferred inflation gauge, the personal consumption expenditures index.
It is worth noting that the Fed’s target inflation rate stands at 2%.
Unfortunately, the recent significant surge in interest rates is likely to create additional economic pressures in the coming months. This is expected to result in reduced consumer spending and scaled-back business investments.
Consequently, there will be a noticeable slowdown in US economic growth, leading to an increase in unemployment from the current level of 3.8% to an estimated 4.4% by next year. However, experts believe that a sharp surge in unemployment is unlikely due to companies’ reluctance to lay off workers amidst an ongoing labor shortage and difficulties in hiring.
In conclusion, while there have been positive developments concerning inflation and interest rates, it is crucial for the Fed to exercise caution and remain attentive to potential challenges on the horizon.