The economy and inflation are lining up as investors hoped they would.
All eyes were on the Fed this week as it held its first policy committee meeting of 2024—and even though these key decision-makers aren’t cutting rates yet, they had reasons for optimism.
Why? The latest data shows the economy is behaving like the Fed (and investors) had hoped it would after its period of interest rate hikes.
- U.S. GDP (which measures all the goods and services produced) rose by a robust 3.3% annualized rate in the fourth quarter of 2023—down from 4.9% in the third quarter and higher than the 2% rate that had been expected.
- Core inflation—as measured by the Fed’s preferred gauge, the personal consumption expenditures (PCE) core price index—has averaged just 1.5% annually over the past three months.
When you factor in the Fed’s long-run target of 2% (upper range) for both real GDP growth and inflation, it’s clear that the economy is staying healthier than anticipated—while inflation is simultaneously moving lower than expected.
That’s essentially an ideal scenario in the eyes of many Fed policymakers. That said, after missing the initial surge in inflation in 2021, they’ll need to see this trend continue before deciding that an interest rate cut is in order, as Fed Chair Powell made clear this week. While that might happen at the Fed’s next meeting in March, we may not see a rate cut until later in 2024.
Of course, as we’ve noted, stubbornly high housing costs could keep inflation (and interest rates) elevated. That said, housing is a relatively small component of the PCE price index and may have a modest impact on the Fed’s decisions going forward.
The upshot: The economy and inflation are moving in the right direction—a fact we believe the Fed recognizes.
For more news, information, and analysis, visit the ETF Strategist Channel.
This commentary is written by Horizon Investments’ asset management team. Past performance is not indicative of future results. Nothing contained herein should be construed as an offer to sell or the solicitation of an offer to buy any security. This report does not attempt to examine all the facts and circumstances that may be relevant to any company, industry, or security mentioned herein. We are not soliciting any action based on this document. It is for the general information of clients of Horizon Investments, LLC (“Horizon”). This document does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. Before acting on any analysis, advice, or recommendation in this document, clients should consider whether the security in question is suitable for their particular circumstances and, if necessary, seek professional advice. Investors may realize losses on any investments. Asset allocation cannot eliminate the risk of fluctuating prices and uncertain returns. All investing involves the risk of loss.
Reference to an index does not imply that any account will achieve returns, volatility, or other results similar to that index. An index’s composition may not reflect how a portfolio is constructed in relation to expected or achieved returns, portfolio guidelines, restrictions, sectors, correlations, concentrations, volatility or tracking error targets, all of which are subject to change. Individuals cannot invest directly in any index. Indices are unmanaged and do not have fees or expense charges, which would lower returns. The investments recommended by Horizon Investments are not guaranteed. There can be economic times when all investments are unfavorable and depreciate in value. Clients may lose money. This commentary is based on public information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied on as such. The opinions expressed herein are our opinions as of the date of this document. These opinions may not be reflected in all of our strategies. We do not intend to and will not endeavor to update the information discussed in this document. No part of this document may be (i) copied, photocopied, or duplicated in any form by any means or (ii) redistributed without Horizon’s prior written consent. Forward-looking statements cannot be guaranteed. Other disclosure information is available at www.horizoninvestments.com.
Horizon Investments and the Horizon H are registered trademarks of Horizon Investments, LLC
©2024 Horizon Investments LLC.
