Danielle DiMartino Booth & George Goncalves on The 2024 Fed Pivot: Recession or Soft Landing?

Episode Summary

Executive Summary: The discussion centered on a 2024 macro “bumpy landing” as fiscal stimulus fades, labor-market weakness emerges beneath strong headline data, and the Fed prepares to cut rates while still shrinking its balance sheet. Both guests expect cuts to begin soon, but warn that rate cuts alone may not prevent a mild recession, especially with looming corporate refinancing, tightening credit conditions, and weaker household spending.

Main Topics: 2024 macro outlook: soft landing to bumpy landing (Priority: 5/5): Both guests argued 2023 was the soft-landing phase, but 2024 should show the economy slowing as pandemic-era fiscal support fades and the consumer loses momentum. Federal Reserve rate cuts and timing (Priority: 5/5): They broadly expected the Fed to begin cutting in March, likely in 25 bp increments, with the market underestimating how quickly conditions may force more aggressive easing. Quantitative tightening and balance sheet management (Priority: 4/5): The Fed is expected to keep QT in place even as it cuts rates, potentially shifting the composition of runoff toward mortgages and eventually toward a Treasury-only balance sheet. Labor market weakness hidden beneath headline payrolls (Priority: 5/5): They emphasized revisions, household survey weakness, WARN notices, and low-quality job creation as signs the labor market is weaker than headline nonfarm payrolls suggest. Fiscal support fading and election-year politics (Priority: 4/5): The panel argued direct household stimulus and pandemic-era support are waning, while election-year programs could still inject temporary cash, but the broad trend is toward fiscal drag. Credit spreads, refinancing wall, and recession risk (Priority: 5/5): A major concern was the March-April corporate refinancing wave, especially in high yield, where spread widening could expose stress and force the Fed to respond more aggressively. Treasury yields and fixed-income positioning (Priority: 4/5): They saw the peak in long rates as likely in place, with more upside in front-end Treasuries than in long duration or high yield credit.

Key Arguments: 2023 functioned as a soft landing because disinflation boosted real incomes while growth held up, but that transition is ending as fiscal support fades. The consumer is weakening as wage growth, income expectations, and spending expectations soften, while job creation is concentrated in low-paying sectors. Headline payroll gains are misleading because revisions, the household survey, WARN notices, and business closures point to a much weaker underlying labor market. The Fed appears spooked by both macro and financial conditions, not just easing inflation, and may be preparing to cut sooner to avoid a sharper downturn. QT is likely to continue even during rate cuts, with the Fed potentially tapering Treasury runoff and using mortgage prepayments to reshape the balance sheet. Corporate refinancing needs in March-April 2024 create a maturity-wall risk, especially for high yield issuers, which could widen spreads and pressure equities. Even meaningful rate cuts may not fully reignite growth unless the Fed returns to much easier policy; a mild recession remains the base case. High deficits and debt levels make it hard for long rates to rise much further, but credit spreads could still widen if growth slows. Government spending and election-year measures may temporarily support households, but they do not resolve the underlying cash-flow and credit problems. Private-sector credit stress, not just stock-market volatility, is what would ultimately force a stronger Fed response.

Data Points: Fed funds upper range: 5.5% - Current policy rate discussed as the starting point for expected cuts Expected 2024 rate cuts: 175 basis points - George’s base case for cuts from March through year-end Potential year-end fed funds upper range: 3.58% to 3.75% - Implied level after six or seven cuts March cut probability/timing: March 2024 - Both guests saw March as the likely start of easing Possible first cut size: 25 bps or 50 bps - George said 50 bps would depend on banking stress Nonfarm payroll gain in December: 216,000 - Headline job creation cited as superficially strong Payroll job mix in 12-month period: 81% - Share of jobs created in leisure/hospitality, government, social assistance, and health care Monthly revision average Jan-Nov 2023: -48,000 - Average downward revision to monthly payroll prints Government share in July revision: 99,000 jobs - Government jobs accounted for most of the positive revision that turned private payrolls negative Private-sector July revision net: -49,000 - After excluding government jobs, July private payroll revision was negative Continuing jobless claims: about 2 million - Used as evidence of labor-market deterioration Headline unemployment effect if household survey held constant: close to 4% - Illustrative estimate if household job losses were reflected more fully ISM services employment index: 43.3 - Described as pre-recessionary or recessionary ISM services employment prior reading: 50.7 - Previous level before the drop Credit card delinquencies: highest since 2012 - Noted as elevated, though still low versus 1994-2012 when extended historically U.S. deficit in 2023: $1.7 trillion - Official deficit cited for last year Fiscal running-rate deficit by Sept. 30: close to $2 trillion - Used to show continuing heavy fiscal support Pre-COVID deficit baseline: $500 billion - Comparison point to highlight scale of post-COVID deficits Potential ERC stimulus: $200 billion - Possible direct cash infusion if employee retention credit claims are revived Student loan forgiveness already delivered: $175 billion - Amount cited as already excused by the administration T-bill yield advertised by sponsor: 5.4% - Public ad mentioned during the episode, promoting Treasury bill yield High-yield spread base case: 340 to 500 bps - George’s expected range for high-yield credit spreads Current high-yield spread level: low 300s bps - Starting point at the beginning of the year Potential 10-year Treasury target: 4.25% initially, then low 3s - George’s view on long-end rates Mortgage-rate target scenario: 5.5% to 6% - Expected everyday household mortgage rates even if Treasury yields decline RRP decline since debt ceiling resolution: downward since resolution - Fed balance-sheet runoff channel via reverse repo facility

Pivotal Quotes: "This is going to be the year that direct fiscal stimulus finally ends." — Daniel DiMartino Booth: Her core 2024 outlook: fading household support and a regime shift for consumers "We’re going to throw out that hashtag H4L, higher for longer is not going to keep with us any longer." — George Goncalves: He argued the Fed cannot sustain restrictive rates for much longer given debt and growth fragility "You don’t want QE to come back again, you want the banking system to come back online, you want lending to be organic and not just come from easy money." — George Goncalves: His view on why QT should continue and why balance-sheet policy matters

Implications: Listeners should expect slower growth, softer labor data, tighter credit, and likely Fed easing starting soon. Even with cuts, recession risk and refinancing stress remain meaningful, while QT and credit spreads may matter more than headline rate moves.