The Fed last week left its Fed funds interest rate unchanged at 5.25% to 5.50%, but signaled that interest rates are going to be “higher for longer.” Markets responded with the 10-year U.S. Treasury rising to 4.45% — its highest since 2007 — and the S&P 500 falling 2.93%.
- The Fed’s end-of-meeting statement provides good insight into their current thinking: “Recent indicators suggest that economic activity has been expanding at a solid pace. … Inflation remains elevated.”
- Their September Summary of Economic Projections (“SEP”) indicated one more ¼% rate hike in 2023, its policy rate at 5.1% at the end of 2024, slightly lower 2023 year-end PCE inflation, and stronger economic growth: doubling its 2023 GDP growth forecast to 2.1% from 1% in June and increasing its 2024 forecast to 1.5% from 1.1%, i.e. the “soft landing.”
- Although happy to see their increased optimism for the economy and labor markets which will be supportive of equity markets, we believe there are still some risks to growth and low unemployment from the higher interest rates and negative money growth.
- Economic growth and the unemployment rates are not linear, meaning they can change abruptly and without notice. In the “past 12 recessions since World War II, average real GDP was 3% in the month prior to the start of recession.” (BofA Global Research & Bloomberg)
The Rise of generative artificial intelligence is increasingly a focus of business and top government policymakers, with the heads of Google, Microsoft, Tesla/”X”, FaceBook and others recently appearing before Congressional leaders.
- McKinsey consulting suggests AI could contribute $49 trillion to U.S. GDP over the next decade by augmenting labor and capital productivity. Its research estimates AI could add the equivalent of $2.6 trillion to $4.4 trillion annually across the 63 use cases it analyzed.
- Fed governor Lisa Cook recently indicated AI’s macroeconomic impact depends on whether it turns out to be a “general purpose technology” that improves productivity across a wide array of industries, as tech advances and electrification did a century ago. (Axios)
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