October 2023


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Markets are anticipating a rapid easing cycle in 2024 ahead of a return to “normal” monetary policy. But what is “normal” in a post-pandemic world? Lee Ferridge, head of Multi-Asset Strategy for North America at State Street Global Markets, addressed this question and shared his views of the global macroeconomic outlook for the remainder of 2023, and what is in store for markets in 2024.

“We have become accustomed to permanently close-to-zero rates. That is not normal. We are now returning to the old normal and the market estimates of neutral rates have not adjusted to reflect this yet,” said Ferridge. The biggest surprise of 2023 has been the “pure resilience” seen in the global economy, particularly in the United States, despite rapid interest rate hikes, he noted.

Ferridge identified three major themes in the United States macroeconomic and investment outlook for the months and quarters to come:

According to Ferridge, over the last 18 months, Federal funds have gone up by 550 basis points amid a huge and rapid rate-hiking cycle. Despite these rate hikes, Ferridge said, growth expectations from the start of the year rose sharply from 0.3 percent to 2 percent.

“The Atlanta Fed expects the third quarter of 2023 to see 5 percent growth — the strongest since 2003. The Fed’s supportive fiscal policy and robust consumer spending have driven this trend,” said Ferridge.

Compared to other advanced economies like the Eurozone, the United Kingdom and Japan, the US economy has enjoyed the strongest recovery, as measured by gross domestic product, within the G7 nations. Ferridge noted that US growth has been buoyed by consumers’ excess savings and the structure of the mortgage market, particularly in recent months.

“The level of excess savings in the US is much higher than elsewhere, due to the structure of the fiscal response during the pandemic. And that's one of the major reasons why the US consumer has been doing okay. The other thing that is unique to the US is that for most people, higher interest rates have made no difference, due to the long-term fixed rate mortgages that dominate lending,” he said.

While the US labor market continues to be strong, it faces a structural shortage of workers. Compared with the pre-pandemic trend, we are suffering around a three million shortfall of workers currently in the US, driven largely by retirements, which may pose a big problem in the future.

“That is a huge strain on deficits because you have an aging population, and when it comes to health care for the older generation, that's going to eventually weigh on the government,” he said.

So, what does all of this mean for investors? According to Ferridge, the era of zero percent interest rates is over. Yields are on the higher side and sovereign bond flows are also showing a strong comeback. “As yields go up, real money investors are buying them,” he said.

When it comes to interest rates, he predicted cuts could start in late 2024, adding that the US may be entering a new economic era with implications for monetary policy and financial markets.

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