S4-14: US Economy 2024: Outlooks on Interest Rates, Inflation, Concerns

Stock Market Performance and Tech Rally in 2023

Meghan discussed finance and economics after their holiday break. They reviewed the strong performance of the stock market in 2023, which ended up being up 26% despite a more muted year in 2022. They attributed the market's strong performance to the rally of the "magnificent 7" - big tech names such as Meta, Google, Microsoft, Amazon, Tesla, Nvidia, and Apple. Meghan also mentioned that smaller companies, whether growth or value stocks, significantly underperformed the overall market in 2023, with the only sectors of the market that were down being energy and utilities.

US Economy 2024: Interest Rate Outlook

Meghan discussed the impact of interest rates on the market in 2023, explaining that the market rally in Q4 was driven by anticipation of interest rate reductions coming soon. They noted that while the Fed Funds rate remained constant since July 2023, the market projected interest rate cuts in 2024.

Meghan emphasized the Fed's mission to promote a stable price environment and full employment, and how these factors influence their decision on interest rates. They also cautioned that unexpected events could lead to rapid changes in the economy, prompting the Fed to take emergency action. Towards the end, Meghan answered a question about the Fed's target interest rate, stating that they haven't explicitly stated one but projections suggest they might cut rates in 2024.

Inflation's Impact on Household Budgets

Meghan discussed the impact of inflation on household budgets, specifically focusing on grocery costs. A listener noted that her grocery budget has not been adjusted in a while, leading to regular arguments with their husband.

Meghan shared their plan to update a blog post on consumer collected data to reflect the effects of inflation on budgets. They emphasized that the compounding impact of inflation has led to significant increases in family costs, with food being one of the most affected categories. Meghan also mentioned that many people are eating at home more to manage their budgets due to rising restaurant costs, which continue to grow faster than overall food costs. Additionally, they highlighted the impact of inflation on insurance renewals, especially home and auto policies.

Government Budget Debate: Deadlines and Negotiations

Meghan discussed the ongoing saga of the government budget debate, highlighting that the Federal Government operates on a fiscal year ending 9/30, but the budget for 2024 has yet to be adopted, now four months into the fiscal year. They noted two impending deadlines, January 19th and February 2nd, which are linked to temporary spending measures.

They also mentioned that Congressional leaders have reportedly agreed on top-line spending numbers, with subcommittees now tasked with dividing the budget. Meghan emphasized the importance of these negotiations due to the national debt reaching a record high of $34 trillion dollars.

Debt Cycle Solutions: Cut, Increase, or Invest?

Meghan explains that the government can't issue debt forever due to higher interest rates, which adds to the federal deficit and adds to debt. There are three ways to get out of this cycle: cut spending, increase revenue, or invest in the economy to grow the economy faster. Cuts are not politically popular and challenging to do, while increasing revenue means higher taxes for everyone. Economic growth through investment in training workers with new skill sets and improving productivity can expand the economy and grow tax revenues without raising taxes. This can help reduce the deficit and reduce the federal debt.

Government Budget Impacts on Economy and Taxes

Meghan discussed the impacts of government budget debates on the economy and individual taxes. They highlighted the importance of these debates in making smart economic decisions but also expressed concern over potential tax implications for 2024. Meghan also underscored the real-world effects of government funding decisions, particularly on federal employees and their families.

Banking Sector Risks: Real Estate Bonds and Interest Rates

Lastly, Meghan brought up the issue of commercial real estate, noting the high vacancy rates and potential issues with building owners' ability to pay their loans due to expired leases. Meghan discussed the potential risks in the banking sector due to the significant portion of assets invested in commercial real estate.

They drew parallels between this situation and the issue with bond investments at the start of 2023, where banks experienced losses and even failures. Meghan explained that as interest rates rise, the market value of bonds falls, and if banks are forced to sell, they then realize losses. They predicted that this scenario is likely to recur with commercial real estate bonds.

Meghan also highlighted the expiration of a temporary loan facility created by the Fed in March 2023, which is scheduled to expire in March 2024, which could add to the financial instability. They emphasized that while the economy might appear strong on the surface, there is significant debt and uncertainty that could impact economic growth.

Bank Financial Health Analysis Discussed

Meghan discussed the importance of analyzing a bank's financial health by examining their quarterly financial statements, investor presentations, and earnings calls. She highlighted the impact of a bank's size and diversification on its stability, referencing the 2023 financial crisis. Meghan underscored the significance of monitoring a bank's balance sheets, particularly in relation to commercial real estate assets in the current environment. They also touched on the potential effects of interest rates on company balance sheets and the financial sector. Meghan promised to provide more information on where to find bank filings with the Fed.

Family Finance Mom Book Club Update

Meghan introduced the Family Finance Mom Book Club, a quarterly club that selects a book democratically. They mentioned that the current read, "Titan", a biography of Rockefeller, will have a wrap-up post before the next vote.

Next steps

Meghan also shared their plans to update the average household budget post with data from the 2022 Consumer Expenditure Survey, which will shed light on changes in household finances during the pandemic and the early inflationary period. They highlighted the upcoming release of the CPI report for December and its implications for interest rates. Meghan expressed their intention to return to their regular posting routine and remain accessible for more questions in next week's live Q&A.