The belief among investors that the Federal Reserve would cut rates aggressively in 2024, even in the absence of a growth or employment shock had become near-universal even before the central bank’s decisively-dovish pivot at the December policy meeting.

Inflation is fading quickly. Energy and manufactured goods prices are still coming down, and our estimates suggest that the Fed’s preferred measure—the core personal consumption expenditures index—rose less than 2 percent on an annualized basis over the six months ended in November. Unemployment rates remain near historic lows.

With the legacy of a three-year surge in deficit spending and credit growth still flowing through the economy, consumer spending remains astonishingly strong, and business confidence is stabilizing. The ‘vibecession’ – the deep sense of economic pessimism among consumers, businesses, and the media – is showing signs of ending.

Daily news sentiment score, 3-month moving average

A dramatic easing impulse is hitting the real economy. The number of senior loan officers tightening credit terms fell sharply in the Federal Reserve’s latest survey, suggesting that financial institutions are turning more optimistic – and implying that headline growth rates could hold up remarkably well for many months yet.

Senior Loan Officer Survey, % of respondents