The U.S. economy initially showed greater resilience than expected after the Federal Reserve began raising interest rates in March 2022. But, more than two years later, it seems to be “in a state of unstable equilibrium, with powerful forces pulling the economy in oppositive directions,” according to Apollo Academy’s 2024 mid-year outlook.

Rate hikes by the Fed have limited growth as higher borrowing costs have hurt debt-heavy consumers, businesses and banks, the Apollo Academy study showed. This has led to a greater number of consumer delinquencies and corporate bankruptcies, in addition to more pressure on some banks' balance sheets, especially smaller regional institutions.

Meanwhile, the Fed “pivot” in December 2023 caused an easing of financial conditions that have resulted in a spike of bond issuances and M&A activity while risky assets rallied and bond spreads narrowed significantly, the analysis stated.

Because of the underlying strength of the U.S. economy, easier financial conditions should continue to counter the impacts of Fed rate hikes for at least the next three quarters, according to the Apollo Academy.

Also read: The Federal Reserve Delivered Bad News For The Housing Market This Week

The less difficult monetary scenario is expected to be driven by strong consumer spending, especially on services, continued robust government spending due to recent spending bills, resilient corporate earnings and the “wealth effect” from rising asset prices, according to the study.

“As a result, we expect U.S. economic growth to come in above consensus in 2024, at 2.5%, on the back of a still strong employment picture,” Chief Economist Torsten Slok said.

He forecasted inflation to stay above the Fed's 2% target for the foreseeable future, despite a soft reading of the consumer price index (CPI) in May.

“As of this writing, we remain confident in the view we've held since last year: Interest rates will remain higher for longer,” he said. “We see no Fed cuts in 2024.”

As a result, private credit should “remain a compelling asset class,” he said, while equity value can offer more favorable risk-reward than growth, he added.

But there is still the concern of more people falling behind on their auto loans despite a 4% unemployment rate, Slok said.

“What will happen when the economy really slows, and the labor market shows real cracks? Where will delinquencies go then?”

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Image created using artificial intelligence via Midjourney.