Even if the Fed does cut rates three times in 2024, as signaled on December 13, the Fed funds rate would end the year between 4.5% and 4.75%, still much higher than the virtually zero level when the Fed started its tightening campaign in March 2022. We believe the Fed will keep policy restrictive until it tames inflation back to its 2% annual target, a job that it has yet to fully accomplish. Additionally, long-term rates are high as well, and largely for reasons that aren’t directly tied to the Fed’s ongoing tight monetary policy. The so-called “term premium” has been rising due to a variety of factors including higher borrowing needs by the US Treasury, the loosening of yield-curve control in Japan, and reduced buying and diminished inventory of US sovereign debt held by China and other foreign nations.
- Date Posted:
- January 5, 2024
Throughout most of the years since 1980, annual income growth and sentiment hit their peaks and troughs almost perfectly in step. Furthermore, except for a few quarters between 2001 and 2003, and again in 2016, sentiment never stayed elevated while real income growth remained below average for an extended period. Most importantly, since 2020, real personal income growth has been below its long-term average and quite significantly. Even though economic output and employment were both up in 2021, households began to experience a sharp increase in the cost of living. Rapid increases in consumer prices eroded income gains, causing real income growth to be negative in the final three quarters of 2022; more generally, real income growth has been below its long-term average since the first quarter of 2022. This run of lagging incomes may have put downward pressure on consumer sentiment starting in the second half of 2021. But, as inflation slowed and real income growth accelerated, consumer sentiment also showed signs of improving, with sentiment steadily increasing since headline inflation passed its peak in June 2022.