Economic Monitor – Weekly Commentary
by Eugenio Alemán

Federal Reserve 75 basis points cuts expectation in 2024 lacked conviction

March 22, 2024

Markets have taken the Federal Reserve (Fed) decision to keep about 75 basis points (bps) cuts in its dot plot as a very positive sign that the Fed is going to actually cut 75 bps during the year and are still acting upon the news. However, we believe the dot plot was in flux during this Federal Open Market Committee (FOMC) meeting, and we think this ‘flux’ was more a reflection of the Fed’s lack of conviction regarding inflation, which could threaten the 75 basis points of expected cuts by year-end 2024. This lack of conviction was further reflected in the 2025 dot plot rate cut expectations, which went from 100 bps in December of last year to just 75 bps in the dot plot just released.

It is clear, and the Fed Chairman has been pounding the airways continuously over the last several months, that Fed officials are lacking conviction that the disinflationary process is here to stay. This lack of conviction regarding the disinflationary path has filtered into their lack of conviction on how much interest rates are going to move down this year. For now, they kept 75 bps as their base case but expect changes coming to the dot plot in June if they don’t gain more conviction on the future path of inflation during the next several months.

Although we do not believe that, today, there is a possibility for rates to go up from here, the path downward for interest rates is not as clear as it was in 2023, because the economy has continued to surprise on the upside.

Forecast changes: We no longer have a mild recession

This weekly report includes changes to our economic forecast that are a bit more consequential than what we have had in the past. The major change to our forecast is that we are dropping our “very mild recession” call and moving to a “soft landing” scenario. Although we still believe the U.S. economy will continue to slow during the next several quarters, we no longer believe that the slowdown is going to be enough to bring economic growth to negative territory for two consecutive quarters, which is, correctly or not, what some argue defines an economic recession.

Our change in forecast is related to the fact that real fixed private domestic investment has remained extremely strong considering how high interest rates are today. Our original very mild recession call was predicated on the fact that real residential investment was going to drop, and this was going to take real non-residential investment down, following a deterioration of ‘animal spirits’ whereby negative expectations about the future would push companies to start cutting jobs as well as production. However, although residential investment tanked as soon as the Fed started rising interest rates and continued to fall for nine consecutive quarters, the lack of supply of homes, especially in the existing homes market has, once again, pushed real residential construction up starting in the third quarter of last year. Furthermore, recent strength in new homes construction as well as new home sales is going to continue to keep real residential investment above ground.

The graph below shows the behavior of real residential and non-residential investment over the year on a four-quarter average rate of change and it points out that the current cycle is more similar to the mid-1990’s cycle than to any other cycle in which the economy went into recession. This was a time when the U.S. economy was able to avoid a recession amid increasing interest rates because non-residential investment continued to improve even as the Fed increased interest rates.

At the same time, real non-residential investment has remained above ground during the whole period as higher interest rates have been more than neutralized by the effects of the CHIPS act as well as the IRA, which have produced an impressive increase in the construction of manufacturing plants in the U.S..

Still, higher interest rates are going to continue to weigh on the strength of the U.S. consumer and cut into real personal consumption expenditures as some consumer sectors deal with heavy credit card burdens. However, we still believe that as long as the U.S. consumer has the ability to keep its jobs and remains positive about its ability to keep their jobs, the slowdown in consumption will be measured and not abrupt. Thus, we are expecting consumer demand to slow rather than collapse, barring any severe shock hitting the U.S. economy.

We are also changing our forecast for the federal funds rate for this year and only have three rate cuts rather than three to four as we had until now. However, as we said in the first section of this weekly, we will have to wait until the June dot plot to see if Fed official continue to “lack conviction” regarding the future path of inflation and thus, the path of interest rates.


Economic and market conditions are subject to change.

Opinions are those of Investment Strategy and not necessarily those Raymond James and are subject to change without notice the information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. There is no assurance any of the trends mentioned will continue or forecasts will occur last performance may not be indicative of future results.

Consumer Price Index is a measure of inflation compiled by the U.S. Bureau of Labor Studies. Currencies investing are generally considered speculative because of the significant potential for investment loss. Their markets are likely to be volatile and there may be sharp price fluctuations even during periods when prices overall are rising.

The National Federation of Independent Business (NFIB) Small Business Optimism Index is a composite of ten seasonally adjusted components. It provides a indication of the health of small businesses in the U.S., which account of roughly 50% of the nation's private workforce.

The producer price index is a price index that measures the average changes in prices received by domestic producers for their output. Its importance is being undermined by the steady decline in manufactured goods as a share of spending.

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