Inflation has receded in the U.S., UK, EuroArea, and Japan but remains above their central banks' 2% targets. This piece assesses the different situations faced by the Fed, BoE, ECB, and BoJ, and considers the appropriate policies that would achieve their objectives and their likely course of action.

In an article published in the Wall Street Journal last Monday, I argued that there has been a pickup in productivity and sustainable potential real growth, which has raised the natural real rate of interest. These trends imply that the Fed’s real policy rate of 2.6% (the Fed’s current target of 5.25%-5.5% minus the 2.8% core PCE inflation) is not as restrictive as the Fed perceives, limiting the magnitude of interest rate cuts appropriate to achieve the Fed’s 2% inflation target. The Fed’s view, as reflected in Fed Chair Powell’s testimony on the Fed’s semiannual Monetary Policy Report (MPR) to Congress, is that monetary policy is restrictive and will generate a significant slowdown in economic growth below potential that will lower inflation to 2%. Following this, important data releases throughout the week confirmed the continued health in labor markets and strength in household balance sheets that will support ongoing consumer spending. Later in the week, I also had the honor of discussing these issues with Larry Summers at an investment conference in Phoenix, Arizona. His views on the economy, real interest rates, and the Fed were similar with mine — and capped off a week full of insights.

How will stocks fare and what will happen to interest rates during this Presidential election year? These questions are viewed through three lenses: 1) a historical assessment of economic and financial performance during Presidential election years going back to 1960, including the performance of the S&P500 during Presidential election years, along with changes in the Federal funds rate, inflation, real GDP, employment and the unemployment rate as highlighted in the table below, 2) recent research on Federal Reserve behavior during election years, and 3) prior research on the cyclical linkages between the S&P500, corporate profits and economic expansions.

The lead stories in 2023 were the resilience of the U.S. consumer and the economy that dispelled concerns about recession and lifted expectations about sustained growth; a decline in headline and core inflation that reduced inflationary expectations, despite the damages of stemming from the high level of prices; and the Federal Reserve’s associated shift from higher-for-longer forward guidance to signaling that it will lower interest rates in 2024, which powered a late-year significant decline in yields. Here are the big economic issues in 2024.