Federal Reserve economists have projected a stable outlook for the US economy from 2024 to 2026, deviating from previous recession warnings. This forecast, issued on Thursday, anticipates slower yet positive growth, a robust labor market, and inflation reducing to around 2%.
The forecast comes after the economy weathered a period of high inflation last summer, which peaked at a 40-year high of 9.1%. This surge in inflation led to interest rates rising above 5%. Despite these challenging conditions, consumer and business spending remained resilient, resulting in solid economic growth. This resilience was particularly evident in the strong third-quarter growth.
The economists also addressed concerns related to the S&P 500's forward multiple and high real estate valuations. They dismissed these worries as unfounded, further reinforcing the positive outlook for the US economy in their forecast.
While the Federal Reserve's forecast paints an optimistic picture for the US economy over the next few years, it also acknowledges considerable uncertainty due to external factors. These include potential disturbances from the Israel-Hamas conflict, volatility in the bond market, potential inflation risks, and possible monetary and fiscal responses.
Despite these uncertainties, this new forecast signals a shift in economic expectations. Compared to earlier warnings of a recession, Federal Reserve economists now anticipate a Goldilocks scenario—a state of moderate economic growth and low inflation—for the US economy moving forward.
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