Quarterly Outlook: Is a Soft Landing in Sight?

Main Takeaway

The Federal Reserve may be getting closer to hitting its goal of taming inflation, and attention is turning toward whether it will begin cutting rates this year. Its rate hike campaign has proven effective: money flow has declined, and businesses and consumers have less access to credit. The job market has been feeling the impact, too. Compared to earlier in the year, unemployment has risen, job openings are down, and fewer people are quitting their jobs. Consumer spending has also slowed.

Top Risks

While the outlook for a soft landing — or cooling the economy without causing a recession — is looking more promising, the sharp rise in rates continues to pose challenges. Higher rates reduce the value of banks’ long-term holdings and put stress on consumers. Meanwhile, the government's expansionary fiscal policy increases federal debt, and higher rates raise its debt servicing costs, compounding the nation's debt problem. Inflation could also resurge in 2024, and the Fed may not be able to cut rates as aggressively as the market currently expects.

Sources of Stability

Although economic growth is forecast to slow in 2024, most professional forecasters are not expecting a recession. At their December meeting, the Fed’s policymakers clearly signaled that they would begin cutting interest rates this year. Lower interest rates could boost the more interest rate-sensitive areas of the economy, such as housing, manufacturing and banking. For both inflation and consumer confidence, the sharp decline in oil prices has been a big positive.

For our latest perspectives on markets and economic conditions, view our Quarterly Outlook for Q1 2024.

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