As 2024 got underway, the US continued to be the brightest spot for growth in the global economy.

But that was coupled with a worrying pick up in underlying inflation. The path to monetary easing in America no longer looks so clear cut. Financial markets that boomed in Q1 are now less confident.

Adding to uncertainty, the government reported in late April that preliminary data for Q1 GDP showed an unexpected slowdown in the economy from the rapid pace of late 2023. The data likely exaggerated the downside. More importantly, disappointing inflation numbers for each of the first three months of the year may cast a shadow over Q2. The Fed’s preferred measure of core inflation rose at an annual rate of 4.4% in the latest three months to March, well above the 2% goal of price stability. Some cooling is likely in coming months, perhaps accompanied by slower growth and reduced wage pressure. But US central bankers will want a string of better numbers before they begin to relax today’s restrictive monetary policies.

RockCreek sees three themes to watch in the coming months:

Inflation – Again:  For a while at the end of 2023, investor and policymaker attention in the US turned from inflation, which was coming down nicely, to focus more on growth and jobs. That is still the case in Europe where growth is minimal and inflation continues to come down. But in the US, the string of disappointments on inflation data in Q1, coupled with looming concerns about the possible impact of mid-East tensions on energy prices and price pressures from supply issues, whether the Baltimore bridge collapse or attacks on shipping in the Red Sea, have put the focus squarely back on inflation.

Growth Divergence – Will the U.S. continue to grow most rapidly as other economies begin to revive?: After beating expectations and outperforming other countries in 2023, the US economy slowed in Q1. But the underpinnings of growth remain robust: a still tight labor market which is supporting consumer spending. Rising business investment, powered in part by hopes for AI. Can that continue, with interest rates still high? Will company earnings stay strong as wage pressures continue? Higher growth around the world would help US companies, as will the spending power of the American consumer. But much will depend on monetary policy.

Higher for longer rates look likely in the U.S.; will the Federal Reserve be the monetary policy laggard this year instead of the leader?: Slower progress towards price stability in the US together with continued jobs growth have shifted the odds away from a rate reduction in Q2. Contrast this with Europe and Canada, whose central banks have signaled that easing is likely to begin in June. The Fed may end up lagging rather than leading rate cuts around the world. That in turn will support dollar strength – helpful for inflation, less so for profits and growth.

Read the full Q1 2024 RockCreek Commentary Letter