- The U.S. economy this year will probably slow after 3.3% annualized growth last quarter, crimped by an increase in “real” interest rates, or the gap between falling inflation and the Federal Reserve’s benchmark interest rate, according to the Association of Chartered Certified Accountants.
- “Despite the likelihood of a pivot to monetary easing by the Fed, monetary policy is likely to remain restrictive amid elevated real interest rates,” the ACCA said in a report published before a Jan. 31 Fed decision to hold the main interest rate at a 23-year high.
- Fiscal policy and declining consumer spending will also probably cool economic growth to 1.7% this year, the ACCA predicted. Dwindling pandemic savings and slower wage growth will likely crimp consumer outlays, the association said.
The U.S. economy in recent months has slowed but stayed robust, defying predictions of recession. Gross domestic product growth eased during the fourth quarter after surging 4.9% during Q3.
The labor market has also blown away forecasts of weakness. Employers last month added 353,000 jobs, the Labor Department said Friday, in the biggest job creation binge in a year. The hiring tally for December was revised up to 333,000 from 216,000.
Wages exceeded forecasts, increasing 4.5% in January compared with a year earlier, while the unemployment rate was unchanged at 3.7%, the Labor Department said.
As the economy avoided a downturn, confidence among CFOs and other financial executives across North America rebounded in December close to the long-run average, the ACCA found in a survey with the Institute of Management Accountants.
“There was a very large rise in confidence in North America,” the ACCA and IMA said in a report, flagging the increasingly popular view that the Fed “may be able to pull off a soft landing in 2024” by curbing inflation to its 2% goal without causing a recession.
Robust hiring in December and January contradicts the opinion voiced by Fed Chair Jerome Powell that the tight labor market is loosening, with demand and supply for workers coming into better balance.
Trends such as higher immigration during the past several months “have significantly lowered the temperature in the labor market to what is still a very strong labor market,” Powell said at a press conference Wednesday after a meeting by policymakers.
“It's still a good labor market for wages and for finding a job, but it's getting back into balance, and that's what we want to see,” he said.
The central bank held the federal funds rate at a range between 5.25% and 5.5% even after their preferred measure of inflation — the core personal consumption expenditures price index excluding volatile food and energy prices — fell to 2.9% in December from 3.7% in August. Policymakers aim to curb inflation to their 2% target.
The better-than-forecast hiring in December and January followed Powell’s comment Wednesday that the Fed will likely not cut the benchmark interest rate at its next policy meeting on March 19-20. “That’s probably not the most likely case, or what we would call the base case,” he said.
After the hiring report, traders in interest rate futures trimmed the odds of a quarter-point cut to the federal funds rate at the March meeting to 21% from 38% on Thursday.
“We believe that if job growth continues at such a strong pace, this could potentially result in a slower pace of policy rate cuts than what is currently expected in the market,” Fannie Mae Deputy Chief Economist Mark Palim said Friday in a statement.