US Economy: Weekly Commentary – March 25, 2024.
Synopsis of US market sentiments
Interest rates remain unchanged, with the dot plots indicating an expectation of three rate cuts throughout the year. Despite this, inflationary pressures persist at elevated levels. However, there are signs of recovery in the housing market.

The US Federal Reserve maintains its policy, signalling a dovish stance with plans for three rate cuts in 2024. Inflationary pressures persist, prompting caution despite positive growth forecasts. The housing market sees a surge in existing home sales, driven by low mortgage rates and improved builder sentiment. Anticipated rate cuts may further boost sales, but home prices are expected to remain high. We expect at least one cut this year.
FOMC Meeting
The Federal Reserve has opted to maintain its current policy stance, keeping the Fed funds target rate range unaltered. Chairman Powell demonstrated a dovish stance during the announcement.

The Federal Reserve's decision to maintain rates at 5.25-5.5% was widely anticipated, reflecting a unanimous stance by the FOMC. Despite expectations for potential changes, the Fed upheld its forecast of three rate cuts this year, a relief to market concerns. The projection for next year sees only three cuts (75 bp in 2025), down from four in December, signalling a slightly higher median forecast for end-2025 rates at 3.9% and for 2026 at 3.1%. Notably, adjustments were made to long-term Fed funds forecasts, now at 2.6% from 2.5%.
Positive revisions in growth forecasts by the Fed reveal a more optimistic outlook, with projected growth exceeding 2% for the next three years. Additionally, unemployment rate projections for end-2024 were lowered to 4% from 4.1%, while core inflation is now expected to reach 2.6%, up from 2.4% by the end of 2024, remarking the tough to bring the inflation down.

The Fed's cautious stance, emphasises the need for greater confidence in inflation reaching 2% sustainably before considering any reduction in the target range. Chair Jerome Powell suggested the possibility of policy easing towards a more neutral level sometime this year, hinting at a potential shift in approach. Regarding quantitative tightening (QT), Powell acknowledged the likelihood of slowing down this process fairly soon to prevent potential turbulence in financial markets.
Business activity
Inflationary pressures persist at elevated levels, accompanied by a rise in employment. Consequently, the Federal Reserve may opt to maintain higher interest rates for an extended period.

The US business activity maintained solid growth at the end of the first quarter, although slightly lower than in the previous survey period. While services activity weakened, manufacturing production surged at the fastest pace in almost two years. Job creation hit its highest point in 2024, alongside the most optimistic business outlook since May 2022. Inflationary pressures intensified, with input costs rising at the fastest pace in six months, leading to higher selling prices. Despite a slight dip in new orders, manufacturing output expanded sharply, while service sector confidence surged to a near two-year high. Employment rates increased, particularly in manufacturing, aided by capacity improvements and a slowdown in new business. Overall, the outlook suggests a continued economic expansion into the summer, although rising costs may exert pressure on consumer prices shortly.

Inflationary pressures continue to linger at elevated levels, with expectations of further increases in the Consumer Price Index (CPI) as companies pass on costs to consumers. Despite robust business activity, the Federal Reserve is likely to remain unworried about maintaining higher interest rates for an extended duration due to the persistent inflationary environment.
Housing market
The housing market is experiencing a smooth recovery, buoyed by mortgage rates falling below 7% once again.

In February, housing starts reached 1.521 million, up 10.7% from January and 5.9% from February 2023. Building permits also exceeded forecasts, reaching 1.518 million, reflecting a 1.9% increase from January and a 2.4% increase from February 2023. Notably, permits for single-family homebuilding rose by 1.0%, indicating a leading indicator of future starts, while actual starts surged by 11.6%.

This positive momentum aligns with the improved builder sentiment observed in March, reaching its highest level since July. The outperformance of the new home market compared to existing homes persists, driven by factors such as low resale inventory and builders' strategic use of incentives like mortgage rate buydowns to attract buyers.

February saw a remarkable 9.5% surge in existing home sales, marking the most substantial monthly increase since February 2023. However, sales experienced a slight dip of 3.3% compared to the previous year. The inventory of unsold existing homes rose by 5.9% from the previous month to 1.07 million by the end of February. With spring on the horizon, a pivotal period for sellers, homeowners are becoming more receptive to the idea of putting their homes on the market.

While anticipated Federal Reserve interest rate cuts may lead to lower mortgage rates, buoying both new and existing home sales, the single-family new home market is expected to maintain its strength and keep the prices high for longer. We expect a reactivation in H2.
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