2024: Deflation, Election, and No Recession

Inflation has been conquered and will now turn into deflation. Below-target prints will become the norm, and outright deflation will show up in CPI by mid-year. The first Fed rate cut will come at the March FOMC, and the funds rate will end the year at 3-5/8%. Deflation will boost positive sentiment about the booming economy and help the incumbent president’s re-election prospects, but we think the election will in fact be determined by the role of a third party. The Senate will easily be captured by the Republicans, assuring a minimum expectation of gridlock as a bulwark against anti-growth policy initiatives like those seen in 2021 and 2022. Stocks will have another solid year, making new highs in the first quarter and then enduring a sharp correction as the deflation narrative sets in. Long-term bond yields could briefly correct to as low as 3.5%, but something like 4% is a floor. Deflation will be a scare, but will prove to be salutary for growth. Again this year, despite the consensus, no recession.