The self-defeating prophecy of lower rates

The self-defeating prophecy of lower rates

Our March forecast update shows economic growth is still poised to slow somewhat in 2024, but not as much as we forecast in our February outlook.

The more that expectations of lower rates get baked into the collective psyche, the greater the risk of setting back the progress made in bringing supply and demand into balance. That dynamic could push prices higher, which in turn makes the rate cuts harder to deliver.

In recent public comments, Atlanta Federal Reserve President Bostic recounted informal discussions with business leaders who were “ready to pounce at the first hint of an interest rate cut.” We hear the same thing from our clients and have lifted our forecast for capital spending—particularly intellectual property outlays—in the second half of this year.

To the extent that business outlays do ramp up, it points to another source of demand that could stymie the progress toward rebalancing supply and demand. Partly on that basis, we have ratcheted our inflation numbers incrementally higher in the back half of this year.

Nevertheless, a downward trend in inflation remains in place even if the slope of that trend has flattened a bit. The slower progress in bringing inflation down over the past couple of months will not stay the Fed’s hand from lowering rates this year, but it does push the timing back somewhat. We now have just four rate cuts penciled in for 2024, with the first now occurring in June rather than May.

Consumers exhibited a rare glimmer of constraint at the start of the year as they dialed back real spending while reprioritizing non-discretionary outlays. We have lowered only the near-term consumer forecast for now.

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