VGSH - Soft landing in the cards as CBO sees inflation nearing Fed target in 2024

2023-12-18 04:41:55 ET

A soft landing may be in reach as inflation is projected to near the Federal Reserve's 2% target next year without a recession or a surge in unemployment, according to the Congressional Budget Office, which provides nonpartisan budgetary analyses.

As measured by the price index for personal consumption expenditures (the Fed's preferred inflation gauge), inflation is expected to fall from 2.9% this year to 2.1% in 2024, reflecting softer labor markets and slower increases in rents.

But inflation will tick up to 2.2% in 2025 as downward pressures on inflation in food and energy prices ease, the CBO said in its latest forecast that reflects economic developments as of Dec. 5.

"Compared with its February 2023 projections, the CBO's current projections exhibit weaker growth, lower unemployment, and higher interest rates in 2024 and 2025," it said.

The Fed will likely maintain the federal funds rate at the current 5.25%-5.50% level through Q1 2024, and then cut it "in response to slowing inflation and rising unemployment."

The CBO expects economic growth to slow in 2024 amid slowdown in consumption, investment, and exports. Real GDP growth (adjusted for inflation) will likely slow from 2.5% in 2023 to 1.5% in 2024 and rebound to 2.2% in 2025 on the back of lower interest rates and improved financial conditions.

"Labor market conditions soften in 2024... and the unemployment rate rises from 3.9% in Q4 2023 to 4.4% in Q4 2024 and remains close to that level through 2025," the CBO projected.

Interest rates on Treasury securities will likely peak in 2024 and recede through 2025. The rate on the 10-year Treasury ( US10Y ) is expected to climb to 4.8% in the second half of 2024 and begin to fall in mid-2025.

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