1. What is your macro outlook for 2024?

I anticipate trend-like GDP growth of 2% for the U.S. economy in 2024, supported by a still-robust labor market and healthy consumer. While trend growth is our current base case, avoiding a recession after a monetary tightening cycle is not the norm. Since the 1950s, we have seen eight recessions following monetary tightening cycles, but only three soft landings. Favor a strong economy, but bake some cushion into your liquidity strategies to prepare for a range of scenarios, including a less likely adverse macro environment.

2. Is the Fed done with rate hikes?

Yes, the Fed is done for this cycle. We have seen significant progress in driving down headline inflation from a peak of 9.1% in June 2022 to 3.1% today. Remember, strong 5% GDP growth in Q3 2023 and 3% GDP growth in Q4 were not enough to sustainably derail this broader disinflationary trend, and consensus estimates for full-year 2024 are a much more tepid 1.5%.

3. Will the Fed cut rates in 2024?

Yes. The real Fed Funds rate (Fed Funds minus Core PCE) is now at 2.6%, its highest point since 2007 and near levels that have preceded cuts in the past. Taking this into account, I anticipate three rate cuts this year, which is roughly in line with Fed projections but less than the almost five moves markets are predicting. I also think the market’s 60% probability for a May cut is high and instead expect easing to start in June. The Fed must be careful not to undo their hard-fought progress and reaccelerate inflation by acting too early.

4. Will the Fed start to taper quantitative tightening?

Quantitative easing (QE) and quantitative tightening (QT) are relatively new Fed tools first implemented during the global financial crisis. Despite their limited use in the U.S., we do know the Fed stopped QT about five weeks after initiating rate cuts in July 2019. If recent history is any guide, I see QT ending when easing begins around start of summer.

5. How should we invest?

Fixed income portfolios typically benefit when monetary policy shifts from tightening to easing, even along the front end of the curve. Despite the rates rally in Q4 2023, we do not think it is too late to add duration risk in liquidity portfolios. Case in point: Over the past year, weighted average maturity in government money market strategies has increased to the higher end of its range, from about seven days to roughly 50 days.

Source for data: Bloomberg

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