Bets on a strong U.S. economy will wait for Federal Reserve interest rate cuts

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Analysts have upgraded their forecasts for the U.S. economy this year, boosting hopes for a soft landing and the Federal Reserve delaying interest rate cuts until the summer.

Strong growth in the final quarter of 2023 and a continued slowdown in the U.S. labor market in January mean economists polled by Bloomberg now expect gross domestic product to grow 2 percent this year, more than twice what they expected by the end of 2023. .

„The U.S. economy is very strong and a key engine of global growth,” said Gregory Dago, chief economist at EY, who recently raised his forecast for 2024 to 2.2 percent from 1.8 percent. „There are hiccups, but overall there are no signs of imminent layoffs in the private sector.”

Most analysts now predict the Fed will make its first rate cut in June or July of this year, with a total of three or four quarter-point moves by the end of the year. In January, the consensus was six, starting this month. Market expectations have also moved in line with those predictions.

The brighter outlook is a mixed blessing for President Joe Biden, who oversees a booming economy — but at the cost, potentially, of keeping rates high for longer, giving home and car buyers higher borrowing costs.

Fed Chairman Jay Powell will face a grilling from lawmakers on Capitol Hill this week amid growing market acknowledgment that the Fed will not be in a rush to cut rates even if inflation eases to 2.4 percent in January from 7 percent in 2022. .

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„Stronger growth could be something that extends the runway the Fed has to operate,” said Ellen Sentner, chief U.S. economist at Morgan Stanley.

Some analysts think the economy's sustained strength could hold off any rate cuts until the end of the year — especially if markets do some of the work to ease capital spending by lowering bond yields.

„If financial conditions continue to ease, growth will remain strong and the first central bank cut will be delayed,” said Torsten Schlock of Apollo Global Management.

Powell will face questions from the House on Wednesday and senators on Thursday, with the Fed chairman set to emphasize the caution of rate-setters in declaring victory against the worst inflation in a generation.

He is also likely to reiterate that any reductions in borrowing costs from a 23-percent range of 5.25 percent to 5.5 percent will only happen if the central bank is confident it can meet its 2 percent inflation target.

The Fed's most recent report of rate-setters' own expectations came in December, and they expected the central bank to make three-quarter point cuts this year.

A new round of forecasts will be released after the next rate-setting referendum on March 20. Some expect the Federal Open Market Committee to upgrade its 1.4 percent GDP growth estimate this year.

The recent monthly rise in the personal consumption expenditure index, a measure of inflation, and the strongest job outlook since January supported the central bank's reluctance to cut rates.

„The background is that many on the FOMC are concerned that easing monetary conditions could re-accelerate inflation,” Gentner said.

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„If the economy comes in stronger than expected, I don't think the Fed will cut, but it means the Fed will be more cautious in delivering cuts.”

Behind the economy's slowdown, analysts say consumers will continue to want to spend.

„Consumers have better balance sheets than we thought at the start of the year. We still expect some slowdown, but this is likely to be pushed back to the second half of the year,” said Satyam Pandey, chief US economist at S&P Global Ratings.

Pandey now believes the U.S. economy will grow 2.4 percent this year, down from the November forecast of 1.5 percent.

„As long as the labor market holds up, this strength in consumer spending gives hope that it will continue for some time.”

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