In a recent conference call hosted by Prosperity Planning, economist Marci Rossell, Ph.D., shared valuable insights on the current state of the economy, touching on crucial topics like inflation, interest rates, and the housing market. Here’s a breakdown of her expert perspectives on the evolving economic landscape and the implications for the coming years.
Economic Overview: The Federal Reserve’s Moves and Inflation Trends
Over the past two and a half years, the Federal Reserve has tackled inflation head-on by raising interest rates, a strategy that initially led to concerns about slowed economic growth and even the potential for a recession. Yet rather than a drastic downturn, we’re seeing a shift that suggests the beginning of a “soft landing”—an easing of inflation without major disruptions in job growth or GDP. Recently, the Fed cut interest rates as inflation steadied around a manageable 2.5%, signaling a return to economic stability.
Marci explained that while inflation has slowed, prices remain elevated for essentials like groceries, rent, and healthcare, making this “new normal” still feel expensive for many. Despite the higher baseline of prices, the broader economy has shown resilience. GDP has grown from $25 trillion in 2022 to an impressive $28 trillion, and the stock market remains strong. This balance, in which inflation is controlled without a recession, reflects a promising outlook for ongoing economic stability.
Housing Market: Unusual Trends Amid Rising Rates
The housing market, however, has experienced unique pressures due to increased mortgage rates. Marci noted that typical economic cycles would expect higher mortgage rates to temper demand and push prices down. Yet, high millennial demand for homes, coupled with a limited supply, has kept home prices elevated. Many homeowners with low-rate mortgages are reluctant to sell, which restricts available inventory and continues to support rising prices even as transaction volumes decline.
Looking forward, Marci predicts that mortgage rates may stabilize around 5.5-6%, potentially easing demand just enough to allow supply to catch up. This adjustment could lead to a more balanced housing market, one less strained by the current high-rate environment.
Policy Considerations in an Election Year
In an election year, economic policies are naturally under greater scrutiny. While Marci emphasized that economic cycles are generally unaffected by elections, specific policies can indeed influence growth, jobs, and inflation. She advised assessing policy proposals by considering key questions:
Does the policy address a market failure?
Is it neutral and fair to all groups?
Do its benefits outweigh its costs?
Is it focused on economic issues, or does it include broader social aims?
These considerations help determine if policies are beneficial or if they might introduce unintended economic distortions.
Technology and Energy: Future Challenges and Opportunities
Marci highlighted how AI’s growing power demands are influencing the energy sector. She expressed confidence that the U.S. energy sector’s advancements will meet these demands efficiently, potentially reducing reliance on foreign energy sources.
Looking Ahead: A Path Toward Stability
As the economy settles into a steady growth pattern, Marci anticipates that 2025 could bring a more stable rate environment, with the Federal Reserve aiming for a “neutral rate” near 4%. This target rate would balance economic stability with sustainable growth, fostering healthier conditions for various sectors, particularly housing.
Audience Q&A: Key Economic Questions Explored
During the call, Prosperity clients posed thoughtful questions that helped Marci dive deeper into economic nuances:
When asked about the recent rise in the 10-year Treasury yield following a 50-basis-point rate cut by the Fed, Marci explained that while short-term rates align closely with Fed policy, long-term yields reflect broader economic expectations. In this case, robust economic performance implies that future Fed cuts may be limited, sustaining elevated yields on long-term securities.
When asked about the efficacy of tax cuts for economic growth, Marci noted that while tax cuts often spur growth, the overall impact varies with the economic environment and current debt levels. Expanding the tax base could yield more consistent benefits by distributing the tax burden more broadly.
When concerns were raised about China’s economic slowdown and potential impacts on the U.S., Marci cited China’s real estate challenges and demographic shifts, emphasizing the need for balanced U.S. policies that maintain national security without prompting aggressive actions from China, particularly in the Taiwan region.
When asked what might trigger a U.S. “fiscal reckoning”, Marci responded that a sharp rise in Treasury yields could force a fiscal response, as higher rates would increase debt service costs. She remained optimistic, however, citing the U.S. economy’s fundamental resilience and its capacity to manage its debt responsibly.
Concluding Remarks
Marci’s commentary provided a nuanced understanding of the economy’s adaptability and resilience. While challenges remain, especially in managing elevated price levels and an imbalanced housing market, the economy is on a promising path as it approaches 2025. With inflation under control and economic growth steady, the groundwork appears set for a period of stability and opportunity in the coming years.
This insightful discussion offered a comprehensive view of today’s complex economic interconnections and providing a clear picture of what to expect as we navigate this unique economic chapter.
As always, we appreciated Marci’s insights and perspective on current events and the economy. See below for the audio recording if you would like to listen to our call with Marci yourself.
Finally, if you have any questions about Marci’s comments or would like to discuss how these insights may impact your portfolio or investment strategy, please feel free to schedule a meeting with our team by giving us a call.
Marci’s commentary reflects her own analysis and views on the economy and her comments should not be construed as investment advice. Investment advice, financial planning, and retirement plan services are provided by Prosperity Planning, Inc., an SEC registered investment advisor. The information contained herein, including but not limited to research, market valuations, calculations, estimates, and other material obtained from these sources are believed to be reliable. However, Prosperity Planning, Inc. does not warrant its accuracy or completeness. The information contained herein has been prepared solely for informational purposes and is not an offer to buy or sell or a solicitation of an offer to buy or sell any security or to participate in any trading strategy. If an offer of securities is made, it will be under a definitive investment management agreement prepared on behalf of Prosperity which contains material information not contained herein and which supersedes this information in its entirety. Any investment involves significant risk, including a complete loss of capital and conflicts of interest. Certain risks are summarized below. The applicable definitive investment management agreement and Form ADV Part 2A will contain a more thorough discussion of risk and conflict, which should be carefully reviewed before making any investment decision.
