The US economy is expected to face some challenges in 2024 as inflation slows down and unemployment rises, according to a report by Rabobank, a Dutch multinational banking and financial services company.
The report forecasts that the annual core personal consumption expenditures (PCE) inflation, the Fed’s preferred measure of price pressures, will decline from 2.6% in November 2023 to 1.9% in December 2024. This is below the Fed’s 2% target and suggests that the economy will experience disinflation, or a decrease in the rate of inflation.
The main drivers of disinflation are expected to be a weaker labor market, lower energy prices, and a stronger US dollar. The report notes that the labor market will lose momentum as the fiscal stimulus fades and the Fed tightens its monetary policy. The unemployment rate is projected to rise from 3.7% in November 2023 to 4.4% in December 2024, which will reduce wage pressures and consumer spending.
Energy prices are also likely to fall as the global oil supply increases and the demand moderates. The report estimates that the Brent crude oil price will drop from $75 per barrel in December 2023 to $65 per barrel in December 2024. This will lower the transportation and heating costs for households and businesses.
The US dollar is expected to appreciate against other major currencies as the Fed raises its interest rates and the US economy outperforms its peers. The report predicts that the US dollar index, which measures the greenback’s value against a basket of six currencies, will rise from 96.5 in December 2023 to 100.0 in December 2024. This will make imports cheaper and reduce inflationary pressures.
Fed to hike rates three times in 2024
Despite the disinflationary outlook, the report expects the Fed to continue its monetary tightening cycle in 2024. The Fed has already signaled that it will end its bond-buying program by March 2024 and start raising its benchmark interest rate from near zero in June 2024.
The report projects that the Fed will hike its rate three times in 2024, by 25 basis points each, bringing it to 0.75% by the end of the year. The report argues that the Fed will not be deterred by the disinflation and will focus on the medium-term inflation risks posed by the fiscal stimulus, the supply chain disruptions, and the housing market boom.
The report also notes that the Fed will face some political pressure to keep its policy accommodative as the midterm elections approach in November 2024. The Democrats, who currently control both the White House and the Congress, will likely lose some seats and may even lose their majority in the House of Representatives. The report warns that the Fed may face more scrutiny and criticism from the lawmakers and the public if its policy actions are perceived to harm the economic recovery and the labor market.
US growth to slow but remain above potential
The report forecasts that the US real gross domestic product (GDP) growth will slow from 5.5% in 2023 to 2.5% in 2024, as the fiscal stimulus wanes and the monetary policy tightens. However, the report notes that this growth rate is still above the potential growth rate of the US economy, which is estimated to be around 1.8%.
The report expects that the US economy will benefit from the strong vaccination campaign, the reopening of the services sector, the robust consumer confidence, and the high household savings. The report also anticipates that the US will pass the Build Back Better Act, a $1.75 trillion social spending and climate bill, which will provide some fiscal support to the economy in 2024.
The report identifies some downside risks to the US growth outlook, such as the emergence of new variants of the coronavirus, the escalation of geopolitical tensions, the worsening of the supply chain bottlenecks, and the possibility of a financial market correction.
The report concludes that the US economy will face some headwinds in 2024 as inflation eases and unemployment rises, but will still grow above its potential rate. The report expects the Fed to hike its rate three times in 2024, despite the disinflationary outlook and the political pressure. The report also highlights some downside risks to the US growth outlook, such as the pandemic, the geopolitics, the supply chains, and the financial markets.
