At the end of last year, investors were convinced that a recession was inevitable in 2023, and this December, they believe, that the economy is headed for a soft landing and lower interest rates .

What to expect in 2024?

Even before the Federal Reserve issued a dovish forecast on Wednesday, there was already a robust consensus that the central bank would be able to cut rates next year without precipitating a recession . This conviction was further reinforced with the introduction of the Fed's new "dot plot" forecast, resulting in futures traders assigning a 16% probability of a rate cut next month and an 82% probability of a rate cut by March. .

Image: Inflation projection in the United States. Source: FED

If we look at the upper limit of the forecast , we can understand that there is a possibility within the margin of error that inflation ends 2024 at 3.7%, which would require extra efforts in the United States' monetary policy.

Image: Interest rate projection in the United States. Source: FED

What worries me is the following:

In the month of November, the Core CPI or inflation in the United States was 0.3%. Now, when we imagine that this inflation repeats itself over the next 12 months, we will have inflation of 3.66% per year next year, significantly exceeding the 2% target set by the Federal Reserve . With commodities still under pressure and above pre-pandemic levels, such as iron ore and soybeans , this increases the possibility that inflation for 2024 will be in the upper range of the FED's projections.

Soybean Futures Prices Above Pre-Pandemic Level.

The inflation fever may have subsided, but I would bet that it would be necessary to persist in treatment a little longer until the inflation disease is eradicated. In a variable income market, where emotions are at an all-time high, a mistake can result in penalties for investors.

How can an interest rate forecast help with investments? Contact Wagner Geremia.