US Economy Braces for Slowdown as Interest Rates Peak


Last updated: February 7, 2024

The US economy is set for a significant slowdown in 2024, following the completion of the 2022-23 interest rate hiking cycle. Despite a robust Q3 GDP growth, the strain of monetary policy is expected to reduce growth to a mere 1.1% in 2024.

US Economy Braces for Slowdown as Interest Rates Peak
Courtesy of: https://www.mckinsey.com

Inflation, which is expected to ease to 2.7% from 4.2% this year, will continue to be a sticky issue. This persistent inflation will limit the extent of policy easing, with only 75 basis points of rate cuts predicted for 2024.

The Federal Reserve, which kept its policy rate steady at 5.25-5.5% in November, is expected to start its easing cycle in late Q2 2024. However, the threat of inflation reacceleration will limit the extent of rate reduction.

The US labor market, though tight, is showing signs of loosening. Job vacancies have dropped to their lowest since March 2021, and wage growth has slowed to its lowest pace since summer 2021.

The consumer spending boom in the business sector is also losing momentum. Despite a sharp rise in consumer spending in Q3 2023, real disposable personal income rose by just 0.1%, indicating that the spending strength is unsustainable.

Higher borrowing costs are also impacting corporates, eroding profit margins and leading to hiring freezes and modest layoffs.

In light of these factors, the US economy is expected to grow by 2.4% in 2023 and 1.1% in 2024. The 10-year Treasury yield is expected to settle at 4.2% by the end of 2024.

“Monetary policy is like a brake pedal, and it seems we’re about to feel the squeeze,” said one industry expert. “The economy’s been cruising, but it’s time to slow down and navigate the road ahead with caution.”

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