U.S. sees signs of ‘Goldilocks’ economy till year-end as inflation slows

Goldilocks and the three bears [Anna Haifisch’s illust. (Bloomberg Businessweek)]

The United States economy is expected to have inflation under control and enter a Goldilocks period, where all economic conditions are “just right” with moderate growth and low inflation, as slowing consumer prices in October reinforced the sentiment that the U.S. Federal Reserve (Fed) is done raising interest rates.

Expectations for a Fed pivot peaked on Wall Street on Tuesday local time, a year and eight months after the central bank first began raising rates in March 2022.

In a November survey of fund managers conducted by the Bank of America Corp., 76 percent of the respondents said they believed the Fed’s rate hike cycle is over, up 16 percentage points from the previous survey. The view was driven by the slowdown in the U.S. consumer price index (CPI) last month. The CPI rose 3.2 percent on year in October, below market expectations of 3.3 percent and lower than 3.7 percent in September. Core inflation that excludes energy and food and beverage prices rose 4 percent during the period, down 0.1 percentage points each from the forecast and the previous month, hitting its lowest level in two years and two months.

Even the producer price index (PPI) slowed, affirming the potential for a further CPI decline going forward. According to the U.S. Department of Labor, the PPI rose 1.3 percent from a year ago in October, a big drop of 0.9 percentage points in growth from the previous month. It was also 0.6 percentage points lower than the 1.9 percent consensus reported by Bloomberg. The PPI is considered a leading indicator of the CPI as it is reflected in the prices of final consumer goods with a time lag.

Stock and bond markets also maintained an upward trend. Shortly after the PPI release, S&P 500 Futures gained 0.4 percent and Dow Jones Industrial Average Index Futures 0.25 percent. The benchmark 10-year U.S. Treasury rate, which hit a 5 percent level last month, fell to the range of 4.5 percent after the PPI release.

The day’s market was most often compared to a Goldilocks period as inflation is almost under control and the U.S. economy is growing more robustly than expected by many measures.

“This does feel like a Goldilocks moment for the entire market,” North Star Investment Management Corp. chief investment officer Eric Kuby said. Economists also believe that the Goldilocks period will continue through the end of the year, citing that the U.S. gross domestic product (GDP) surprised the market with a 4.9 percent jump in the third quarter and that private consumption is likely to stay strong until the end of the year.

But the consensus is that a rate cut is inevitable starting next year as inflation is expected to slow and a mild recession could be coming from higher interest rates and depleting savings balances in the first half of 2024. UBS AG forecasts that the U.S. economy will slip into recession from the second quarter next year and that the Fed will cut rates starting in March.

Meanwhile, Fed officials have cautioned against declaring an early victory in the war on inflation, saying the 2 percent inflation target is yet to be achieved. While inflation readings have come down, much of the decline came as part of paring gains during the Covid-19 pandemic, according to Tom Barkin, chief executive officer and president of the Federal Reserve Bank of Richmond. He noted that housing cost growth remains higher than in the past.

Chicago Fed President Austan Goolsbee also said that inflation data will be observed to determine the rate cut, adding that “the key to further progress over the next few quarters will be what happens to housing inflation.”