Apollo Management Chief Economist Torsten Slok said that a re-accelerating US economy, coupled with a rise in underlying inflation, will prevent the Federal Reserve from cutting interest rates in 2024.
“The bottom line is that the Fed will spend most of 2024 fighting inflation,” Slok wrote in a Friday note to clients. “As a result, yield levels in fixed income will stay high.”
The Apollo chief economist pointed to a “big jump” in US growth expectations and an easing in financial conditions following the Fed’s December pivot towards easier monetary policy that he said will keep the central bank on hold this year. Slok also flagged a tight labor market and sticky wage inflation, alongside manufacturing, services, and rental data trending higher.
“The market now has to realize that the data is just not slowing down, and the Fed pivot has given an additional tailwind to the economy and to financial markets and financial conditions and to capital markets,” Slok said during a subsequent interview with Bloomberg Surveillance Radio on Friday. “All that is likely to continue to be supporting growth in consumer spending, in capex spending, in hiring for most likely the better part of this year.”
Slok’s comments come after the Thursday release of the Fed’s preferred inflation metric, the core personal consumption expenditures price index, showed an increase of 0.4% in January, the fastest pace in nearly a year.
In a Friday note to clients, rates strategists at Bank of America said it is quite likely the Fed will shift this month their 2024 outlooks for GDP and inflation higher. “This macro projection shift naturally raises the risk of the Fed signaling fewer cuts in ‘24 at the March FOMC,” they wrote.
Current pricing for swap contracts estimating the outcome of future Fed rate decisions now anticipates slightly more than three quarter-point rate cuts this year, roughly in line with the central bank’s own median expectations. Treasuries gained Friday after a reading of US consumer sentiment fell in February for the first time in three months.
Slok joins a growing chorus of Fed watchers — from former Treasury Secretary Lawrence Summers to Wall Street strategists at Citigroup — that increasingly see the central bank keeping borrowing costs higher for longer or even moving to hike interest rates this year. In mid-February, Summers told Bloomberg Television he sees a “meaningful chance” that the next move from the Fed would be a rate increase, not a cut.
The Fed will be “very reluctant” to hike rates this year, Slok told Bloomberg Surveillance Radio. “But I do think at the same time it’s clear that the market has, on the back of the Fed pivot, declared victory and said inflation is no longer a problem. The problem is that inflation is indeed looking like it’s becoming a problem again,” he said.