Fed Unlikely to Cut Rates in 2024: Apollo Economist Torsten Slok's Analysis Suggests Strong Inflationary Pressure and Economic Momentum

Fed Unlikely to Cut Rates in 2024: Apollo Economist Torsten Slok's Analysis Suggests Strong Inflationary Pressure and Economic Momentum 

Two weeks ago, amidst rising inflation, surging oil prices, and unstoppable gains in the housing market, coupled with stocks reaching all-time highs fueled by a tech bubble resurgence that pushed bitcoin to record levels, we pondered whether the Fed's next move might involve a rate hike. This speculation, even if it meant potential fallout for more banks, could lead to the Fed adopting both a hike and quantitative easing simultaneously, echoing the Reverse Twist concept recently suggested by Waller.

Fast forward to today, where Torsten Slok, Apollo's chief economist and steadfast bear, who seems intent on convincing you to divest all your assets to the private equity titan Apollo, has outlined ten reasons why the Fed is unlikely to lower rates at all in 2024, thereby making a rate hike more plausible.

At the start of 2023, the market expected a recession. However, entering 2024, the market anticipated six Fed rate cuts. Contrary to these forecasts, the US economy is not slowing down; rather, it's gaining momentum, propelled further by the Fed's strategic pivot since December. Consequently, the Fed is unlikely to decrease rates this year, indicating that rates will remain elevated for an extended period.

How did Slok arrive at this conclusion?

The economy isn't just maintaining pace but accelerating, evident in the substantial increase in growth expectations for 2024 following the Fed's pivot in December and the subsequent relaxation of financial conditions. Forecasts for US growth continue to be revised upwards. Underlying indicators of trend inflation are on the rise. Supercore inflation, a metric favored by Fed Chair Powell, is showing an upward trajectory. Despite the Fed's pivot in December, the labor market remains tight, with very low jobless claims and persistent wage inflation hovering between 4% and 5%. Surveys of small businesses indicate a growing intent to raise selling prices. Manufacturing surveys reveal an upward trend in prices paid, serving as a leading indicator of inflation. ISM services prices paid are also trending upwards. Surveys of small businesses show an increasing inclination to enhance worker compensation. Rental prices are increasing, with more cities witnessing rising rents, alongside soaring home prices, as indicated in the ninth, tenth, and eleventh charts. Financial conditions continue to ease following the Fed pivot in December, with record-high investment-grade issuance, elevated high-yield issuance, rising IPO and M&A activity, and tight credit spreads, along with the stock market reaching new all-time highs. Given the significant easing in financial conditions, the robust nonfarm payroll figures and inflation observed in January were not surprising, and this strength is expected to persist.

In Slok's estimation, "the crux of the matter is that the Fed will grapple with inflation throughout 2024, leading to sustained high yield levels in fixed income."