S&P's Fed Expectations

S&P left its 2024 outlook for monetary policy in the US unchanged International credit rating agency Standard & Poor's (S&P) announced that it left its 2024 outlook for monetary policy in the US unchanged, predicting that the US Federal Reserve (Fed) will lower the policy rate by 25 basis points at its June meeting and by 75 basis points by year-end. In its statement regarding its forecasts for the US economy, S&P reported that the projected gross domestic product (GDP) growth in the US was increased from 0.8 percent to 1.6 percent in the last quarter of last year, and that the country's real GDP increase for all of 2024 was increased from 1.5 percent to 2.4 percent. The statement noted that the GDP growth forecast for the full year was slightly weaker than the 2.5 percent growth forecast for the US in 2023, and noted that better-than-expected GDP growth in the last quarter of last year and a robust employment market led S&P to raise its forecasts. The statement emphasized that US economic growth exceeded S&P's expectations throughout the second half of 2023, and that the strength in net exports, public spending and the pace of inventory accumulation were surprising. The statement noted that economic activity was hotter than expected in the first quarter of the year, and underlined that consumer spending benefited from a strong labor market. The statement noted that restrictive monetary policy will continue to put pressure on interest rate-sensitive business and housing investments, and that the public sector will likely continue to contribute to growth at a slower pace than last year. The statement conveyed that the US economy is expected to go through a process of below-trend growth as the year progresses, even if it avoids a recession, but emphasized that it is difficult to predict the timing of a cyclical slowdown, given the current business cycle fluctuations. There are signs that the labor market is softening The statement stated that in response to higher economic growth, estimates for 2024 employment growth were also raised, and it was noted that employment in the US is expected to increase by over 100,000 per month in the second quarter. Recalling that the unemployment rate was 3.7 percent in December and January, the statement indicated that this rate will increase further in the next two years, reaching 4.3 percent in 2025. The statement stated that although the labor market seems robust, there are also signs that it is softening, and that measurements regarding market volatility have normalized. It was indicated in the statement that progress towards low inflation will probably be slow, and that it is estimated that core inflation, which excludes variable food and energy prices, will permanently fall to levels compatible with the Fed's 2 percent target in the middle of this year. The Fed is in a “wait and see” mode The statement emphasized that inflation data will continue to attract the most attention this year for the Fed, which is trying to “fine-tune” the timing of interest rate cuts. It was noted in the statement that the decline in inflation has opened the door to the first steps towards easing monetary policy, but although the next move in interest rates is officially expected to be downward, the timing of this is questionable, and the Fed is in a “wait and see” mode depending on the data. The statement conveyed that the Fed’s first interest rate cut will be in June and that it is anticipated that a total of 75 basis points will be cut throughout 2024, with 25 basis points each in the second, third and fourth quarters.