MacroResearchBoard

Diverging Monetary Policy Trends in 2024 – November 27, 2023

A just-published report examined the outlook for global fixed income markets and monetary policies for the coming year. Our expectations for 2023 panned out exceptionally well. We leaned aggressively against the entrenched consensus and called for no U.S. (or global) recession, still higher developed market policy rates and an eventual significant upside breakout in bond yields.

Looking to 2024, the picture is more nuanced given that the global cost of capital has now risen decisively. Our research has shown that monetary conditions are still supportive for the U.S. and euro area economies, but have become restrictive for many of the global “weak links”, particularly those with major household sector imbalances.

In turn, the theme for 2024 will be diverging trends across the developed world in terms of economic growth, monetary policy, and bond market performance. Developed market central banks may be finished hiking rates, but the Fed and ECB will keep rates higher-for-longer in contrast to market expectations of significant rate cuts next year. Conversely, central banks in weak-link economies will eventually be forced to cut rates (and allow their currencies to depreciate) to offset fallouts in their housing markets.