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A resilient U.S. economy continues to surprise


The U.S. economy has proved far more resilient than anyone could have expected despite the Federal Reserve’s efforts to cool it to rein in inflation. The Goldilocks outcome of strong growth and lower inflation was achieved by a timely expansion in the supply side of the economy—mainly better-than-expected gains in the workforce and productivity. This explains our updated economic forecasts anticipating stronger growth, a sturdy labor market, stubborn inflation, and a Fed that will move cautiously toward its first rate cut—including the possibility of not being able to cut interest rates at all this year.

Supply-side forces in the driver’s seat

Given policy interest rates aimed at subduing inflation by restricting economic activity, we would not have expected GDP growth as robust as 3% in 2023. Stronger-than-expected labor supply and productivity gains more than offset the Fed’s aggressive monetary policy tightening. These favorable supply-side forces are likely to subside only gradually, boosting our outlook for 2024. We foresee economic growth around 2% for 2024 and a year-end unemployment rate around 4%.

Meanwhile, we expect demand to persist. As the economy remains resilient and with strong underlying demand, we continue to see the “last mile” of the inflation fight as the most difficult. We believe that the core Personal Consumption Expenditures price index, the Fed’s preferred measure of inflation, won’t follow a smooth path toward the Fed’s 2% goal, with the risk of staying above 2.5% for the year, higher than previously anticipated. (Core inflation excludes volatile food and energy prices.)

The Fed will likely remain cautious

Faced with persistent inflation above its 2% target and the risk of financial conditions easing too rapidly, the Fed will move cautiously toward its first rate cut. Moreover, it’s entirely possible that the Fed may not be in position to cut rates this year and will maintain its federal funds rate target around its current range of 5.25%–5.5% for the rest of 2024.

But a soft-landing scenario with moderate Fed cuts can’t be ruled out. If strong supply-side forces were to persist in 2024, that would likely create conditions in which inflation returned to the Fed’s target at a faster pace without weakening economic growth or the labor market. In that case, supply-side tailwinds would help the Fed achieve the coveted “soft landing.” Because Fed policy doesn’t control the supply side of the economy, such a soft landing would be a welcome and lucky outcome. At the other end of the spectrum, a late-year recession—while no longer our base case—is still possible. We believe it could occur now only if favorable supply-side forces were to subside more quickly than anticipated.

A return to sound money still applies

The developments continue to underscore our view that we have entered an era of “sound money,” with interest rates above the rate of inflation. Having a balanced and diversified investment portfolio is always important. Sound money provides a solid foundation for long-term risk-adjusted returns.


All investing is subject to risk, including the possible loss of the money you invest.

Diversification does not ensure a profit or protect against a loss.

Publication date: March 2024

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