US macro update

The US economy has proven remarkably resilient to rate hikes, and the third quarter is on track to post strong growth. Interest rate sensitivity seems to be rather low and lags to monetary policy tightening seem to be longer than previous cycles – households and businesses termed out their debt aggressively during the era of zero lower bound. Additionally, fiscal stimulus provided significant buffers to absorb income shocks. The labor market rebalancing has come primarily through fewer openings instead of higher unemployment, keeping labor income robust.

But with the policy rate set to stay elevated and inflation having decelerated, real rates will become increasingly restrictive. Lags from monetary policy tightening could be long-lasting, and we now see the economy decelerate in Q4 and tip into a shallow contraction in 2024, delayed from Q3. We still expect credit tightening to slow cyclical spending, and we see diminishing tailwinds and upcoming headwinds to consumers and firms’ finances. We are therefore raising our 2023 real GDP growth forecast to 2.1% year-on-year from 1.6% and expect growth to average 0.4% in 2024.

The Federal Open Market Committee (FOMC) is on track to leave rates unchanged in September and recent signs of disinflation and moderating job gains raise the odds of 5.25-5.50% being the terminal rate. Guidance will remain hawkish to prevent aggressive cuts pricing, but political pressures next year could mount for the central bank to ease policy at the first sign of economic weakness. We do not expect rate cuts or changes to quantitative tightening (QT) this year and see the first rate cut at the end of Q2 2024.