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Weekly Economic Perspective

Weekly Economic Perspective

March 22, 2024

Weekly Economic Perspectives is intended to share relevant market and economic news and data that we are observing, which help to frame our outlook.  We hope that you find this timely and interesting.

Federal Reserve Leaves Interest Rates Unchanged

Federal Reserve chairman Jerome Powell held a press conference on Wednesday afternoon to answer questions about the meeting minutes from the most recent meeting between the members of the Federal Open Markets Committee (FOMC), which determine the "overnight federal funds rate".  The committee's decision to leave rates unchanged was widely anticipated by market participants, however, the stock market rally that started in November of 2023 was largely predicated on the notion that the FOMC would start with it's "interest rate normalization policy" in March.  Leading up to the meeting, Goldman Sachs adjusted their forecast for the number of interest rate cuts in 2024 from four to three.  However, with the Consumer Price Index (CPI) staying at stubbornly high levels, the Fed's next move will largely depend on whether they feel confident the pace of inflation is slowing to their preferred number of two percent.

Government Debt and Deficits

Our research partner, Hedgeye, recently hosted their Quarterly Themes call on Thursday, with a large portion focusing on US government debt and deficits.  Several troubling points were brought up, listed below.

- From September 27th, 2023 to March 19th, 2024, the government added $1.4 Trillion in debt.

Source: Hedgeye Risk Management, LLC

- Long-term projections made by the CBO assume that federal debt held by the public will be in excess of $146 trillion by 2054, almost 3x from where it is now at $26 trillion.

Source: Hedgeye Risk Management, LLC

- The net interest expense will be $5.5 trillion by 2054, which is 8x from where it is now at $659 billion.

Source: Hedgeye Risk Management, LLC

- The debt-to-GDP ratio will grow to 171%, nearly a double from where it is now at 97%.

Source: Hedgeye Risk Management, LLC

Conveniently, none of the assumptions that are built in to the projections assume that there will be a recession, wars or any other exogenous shocks of any kind.  We know the playbook for dealing with these types of events includes elevated levels of government spending, so we would assume that these projections underestimate the true level of spending that likely will occur.

These dynamics make it imperative that you understand what the implications are for your portfolio and how to position appropriately once debt and deficit spending take center stage by markets.

Have a great week!

Gordon Asset Management, LLC Investment Policy Committee