U.S. Economic Growth Up, Fed Rate Cuts Coming Later

For ETF investors, the key takeaway is not the timing of the first cut, but the signal that policy may stay restrictive for longer. That matters most for portfolios with heavy exposure to duration-sensitive assets, because lower policy rates are often assumed well before they are actually delivered. When that assumption gets pushed out, valuation support for rate-sensitive segments can also be delayed.

This environment keeps the focus on portfolio structure rather than market timing. Investors using bond ETFs as building blocks may want to separate short- and intermediate-duration exposure from longer-duration holdings, since the former generally tends to be less exposed to repricing when yields stay elevated. For equity ETFs, the main issue is not a growth slowdown in isolation, but whether higher-for-longer rates continue to compress the multiples that investors are willing to pay for future cash flows.

The articleโ€™s broader message also reinforces a practical rebalancing point. Stronger growth with slower disinflation can leave balanced portfolios pulled between resilient earnings and sticky discount rates. In that setting, rebalancing discipline matters more than trying to anticipate each Fed meeting. ETF investors should think in terms of allocation bands, not headlines, so that rate expectations do not dominate long-term positioning.

Finally, the delayed-cut backdrop highlights downside asymmetry. If inflation cools more slowly than expected, markets may repeatedly push out easing expectations, which can increase volatility across bond and equity ETFs even without a recession. For long-term investors, that is a reminder that policy patience can be benign for the economy while still being uncomfortable for assets priced for rapid relief.

welcomia By Eric Winograd Stronger economic growth is allowing the Fed to stay patient. That means a likely delayed start for expected interest-rate cuts. The US economy powered ahead in the first quarter, as strong hiring activity and gradually waning inflationary pressures boosted consumer spending, keeping growth on solid footing. In our view, much of that strength will last, supported by changing demographic trends, leading us to increase our 2024 full-year GDP growth forecast to 1.5% in real, or inflation-adjusted, GDP terms. Robust economic activity has caused inflation to cool more slowly, though we still expect price pressures to ease as the year progresses. But the process will likely be slower than previously forecast, and that will likely affect the path of Federal Reserve policyโ€”including rate cuts. We now expect policy rates to stay where they are for several months, before cuts eventually start late this year.

Larger Labor Pool Is Providing Economic Support

Whatโ€™s driven the last few quartersโ€™ strength, and how does it affect the outlook? Many factors that stoked growth last year, including fiscal stimulus, savings stockpiles and rapid inflation cooling, are fading. But net migration flows surged in 2023, which appears to be behind a significant increase in the supply of available workers: over the last three years, the number of new labor-force entrants has been its highest since the early 1980s (Display). New Labor-Force Entrants: Highest Since the Early 1980s Cumulative New Labor Force Entrants (Millions) Past performance does not guarantee future results. Through February 28, 2024 Source: LSEG Datastream With more workers available, businesses have been able to hire more without ratcheting up wages. Indeed, while wages are growing faster than in the pre-pandemic period and are keeping pace with inflation, wage growth has slowed despite robust hiring (Display). That situation helps the US economy grow more rapidly without too much worry about a wage-price spiral that could de-anchor inflation. Wage Growth down Despite Robust Hiring Pace Wage Growth (Percent Change Year over Year) Past performance does not guarantee future results. Through March 31, 2024 Source: Federal Reserve Bank of Atlanta and LSEG Datastream

Higher Growth, Low Concern over a Wage-Price Spiral

In 2024, net migration flows seem likely to boost growth again, which, as we mentioned, bumped up our real GDP forecast to 1.5%. That level is just slightly below most estimates of long-run US potential growth. And if weโ€™re right, it would represent a very, very soft landing indeed. Of course, growth is only part of the equation. A larger labor supply helps tamp down long-run inflation, and the continued deceleration in wage growth suggests little reason for long-term concern about a wage-price spiral. Inflation continued to decline in the first quarter (Display), albeit more slowly than we expected. We think it will take until 2025 for core inflation to fall back to 2.0%. That shouldnโ€™t alarm investors: few would welcome the sharp recession that would be needed to get there quicker. Core Inflation Has Continued to Decline US Core Consumer Price Index (Percent Change Year over Year) Past performance does not guarantee future results. Through March 31, 2024 Source: LSEG Datastream

A Patient Fed Means Delayed Rate Cuts

As long as inflation expectations remain anchoredโ€”as they have so far this cycleโ€”we believe that the Fed can afford to take the long view. That means exercising patience, not forcing inflation down immediately. However, patience works both ways: when inflation decelerates more slowly, as it did in the first quarter, the Fed is likely to respond by delaying rate cuts. That scenario is exactly what we expect. Instead of four rate cuts starting in the second quarter, which we initially forecasted, we now expect only one cut of 25 basis points in the fourth quarter. That may disappoint markets, which have looked for more aggressive easing, but it shouldnโ€™t make a big difference for most investors. As we see it, itโ€™s more important that the Fed be ready to cut rates when inflation falls or growth wobbles than for investors to know exactly when the first cut will happen. The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams. Views are subject to revision over time. Original Post Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
https://seekingalpha.com/article/4685402-us-economic-growth-up-fed-rate-cuts-coming-later

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