Optimistic Economic Outlook Leads To Talk Of ‘Immaculate Disinflation’

The “immaculate disinflation” was perhaps the best characterization of the September FOMC meeting by one economist. More specifically, the updated Summary of Economic Projections (SEP) conveyed a more optimistic outlook where inflation returns near the Fed’s target without any corresponding economic pain.

Although the Fed’s inflation forecasts were little changed from June to September, the median outlooks for GDP growth and unemployment were improved. At the same time, the September projections for the path of the fed funds rate showed fewer rate cuts through 2025. In other words, the Fed believes it can hold the policy rate in restrictive territory for the next two to three years and still maintain trend growth in the economy and historically low unemployment. Some refer to this as the “Goldilocks” scenario for the U.S. economy.

The economy has indeed defied expectations to this point in a cycle that has included 525 basis points of rate hikes and Fed balance sheet reduction. As noted in several past commentaries, a stimulus-fueled surge in household liquid assets is a likely source for much of the resilience, but can this trend continue during the next two years with no material economic pain? This is a primary source of debate within financial markets today.

There are valid arguments for continued economic prosperity amid still healthy fundamentals. However, others can rightfully point to multiple obstacles ahead. First and foremost is restrictive monetary policy, potentially for a longer time frame. The risk of doing too much versus too little has emerged as a topic of discussion by multiple Fed leaders in recent weeks. Earlier in this tightening cycle, Fed leaders appeared unanimous in their fear of doing too little, pointing back to lessons learned from the 1970s inflation battle. More recently, some have expressed concern that doing too much is a greater risk now.

Visit ALM First to read about the latest economic data and overall market trends in the October 2023 Market Commentary.

Jason Haley joined ALM First in 2008 and is the firm’s chief investment officer. He heads ALM First’s Investment Management Group (IMG), which is responsible for leading the investment process and investment theme development. Haley also oversees all capital markets activities, including portfolio management, trading, market research and commentary, and execution of hedging and funding strategies for the firm’s depository clients. He holds an MBA with a concentration in finance and a BBA with a concentration in marketing, both from The University of Mississippi.