Perspectives on Today’s Economy

Q+A

How do you anticipate the Federal Reserve‘s current restrictive stance on monetary policy will affect businesses, especially with the aim to bring inflation back to the 2% longer-run goal?

In terms of the economy, we‘ve had a rapid 525 basis points of rate hikes in 16 months, one of the fastest in 40 years.

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In terms of the overall economy, with a cumulative 525 basis points of rate hikes in 16 months, which is one of the fastest series of interest rate hikes in 40-odd years, the labor market is still firm, but it’s cooling. And unemployment is still below 4%. It has surprised the Fed on how it hasn’t really moved. Job creation is trending lower. The number of job openings is decreasing. Credit rates are decreasing, with people maybe finding it more difficult to switch jobs. Wage growth also has decreased over 2023, leveling out toward the end of the year, but is still healthy.

On the inflation side, core CPI, PCE is trending lower and probably surprised the Fed in how quickly they have fallen. The consumer remains resilient for the time being. Retail sales come in at 0.6% for December, which was higher than expected for the sixth month in a row. We are seeing a divergence in different parts of the economy, whether it’s in housing, manufacturing or the service industries.

As it relates to the Fed, it has indicated that we’ve hit the terminal rate in this interest rate cycle, and the pace of the inflation moving lower has surprised them. They’re very attentive to risks associated with a potential hard landing, but at the same time have reiterated that the economy continues to grow, they are fully committed to the mandate of price stability and returning inflation to 2%.

The lagged impact of monetary policy, market consensus is for a traditional slowdown, slight uptick in unemployment, slightly slower growth and a further deceleration in the pace of inflation, which is something that businesses should be planning for. So, what does that mean in terms of interest, the interest rate market and for businesses? Overall, it’s a really uncertain environment, and businesses should be taking this into account.

With the forecast of GDP growth slowing to about 1.25% this year, how should businesses adjust their strategies to sustain growth in a slower economy?

Slowing GDP growth, if accompanied by lower inflation and lower interest rates, is generally a positive for most businesses.

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Slowing GDP growth, if accompanied by lower inflation and lower interest rates, is generally a positive for most businesses. Hence the term “soft landing.” As growth slows, companies can focus on cost reductions to gain operating efficiencies and reduce their cost of goods sold.

With the Fed continuing to reduce its securities holdings, what impact do you foresee on financial markets, and how can businesses position themselves to navigate these changes?

The Fed buys bonds in times of stress (such as the pandemic) to keep interest rates as low as possible.

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The Fed buys bonds in times of stress (such as the pandemic) to keep interest rates as low as possible. As the Fed unwinds these massive purchases, interest rates are likely to rise. Businesses that were able to lock in fixed rate debt prior to the yield curve spiking are now in a better place than those who let rates fluctuate on their borrowings.

In light of the Federal Reserve‘s forecast and monetary policy stance, what long-term economic planning advice would you offer to businesses to ensure stability and growth?

The market is front-loading short-term rate cuts, implying that the Fed will have to move slightly quicker with five rate cuts in 2024 and two in 2025 before rates bottom out at the start of ‘26 at around 3.25% or 3.5%.

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For businesses thinking about their interest rate costs in terms of short-term rates in the market, the market is kind of front-loading these rate cuts, implying that the Fed will have to move slightly quicker with five rate cuts in 2024 and also then two in 2025 before rates bottom out and at the start of ’26 at around three and a quarter, three and a half percent.

And then more broadly, I would say as it relates to interest costs for businesses and what the market is currently pricing in. A lot of uncertainty with the current environment and businesses should continue to focus on their own budgets, potential growth plans, whether organic or via step change, acquisitions and whatnot, and really asking the question, “Does this require more debt?” And if so, do they have a view on rates? Do they see relative value in fixing their rate, given market expectations of future rate movements currently?

I would say that we at Webster can assist with regular updates on what is impacting interest rate markets and themes running through those markets. And then more broadly executing an interest rate hedge gives the ability for a business to be proactive, tailor a protective strategy around their specific view, depending on their risk appetite and any other requirements that they have.

And it also provides certainty around knowing interest rate liability costs over the life of a transaction or project that essentially can allow for more accurate cash flow management and budgeting as it relates to thinking about median term and the longer term.