What’s the Rush? This was the question posed by Governor Waller in his speech last Thursday. The bond market has now coalesced around the Fed’s projected path for the federal funds rate, with the market pricing in around three rate cuts this year. These may eventually get priced out too. There is no need for an additional rate hike: the Federal Reserve can achieve sufficient additional tightening, by letting the curve un-invert, establishing a positive upward-sloping yield curve.
Rising defence spending will continue to be a tailwind for the global economy in 2024, alongside the AI boom and clean energy investments. For technological and energy security, parallel investments are being pursued in each of the separate economic spheres (US-China). In such a world, the economic gains from comparative advantage are lessened. Upfront capital investments are higher than would otherwise be required.
With governments globally prioritising technological and energy security, alongside higher military spending (carbon intensive), power demand looks set to increase at rates that will make clean energy targets harder to achieve, despite the growth of renewables. Climate change will continue to act as a negative supply shock in the short run. Central banks may be required to keep interest rates higher for longer, to keep a lid on demand growth.
