Our base case points to continued moderating inflation toward central bank targets globally. That said, we expect to see some hiccups, as moderating wage inflation has not followed a straight-line trend lower, due to shifting demographics and labor market dynamics.
Growth is expected to moderate in 2024, as households and companies continue to feel the lagged effects of monetary policy. Investor focus is likely to shift from fears of duration, or interest-rate sensitivity, toward concerns around credit risks. Despite these potential economic headwinds, we anticipate rates to remain higher for longer.
As the data cooled, the market began pricing in significant easing in the first half of next year. We believe the Fed is committed to keeping policy rates steady through 2024 to ensure inflation remains contained and to avoid the stop-and-go inflation that occurred during the 1970s. The Fed is likely to use forward guidance as a key tool to maintain a more restrictive policy in the near term.
Meanwhile, bank balance sheets may remain under some pressure, due to the combination of lower-yielding assets on balance sheet and risks stemming from commercial real estate (CRE) exposure. However, residential real estate is broadly expected to remain well supported in both single and multi-family housing. National home prices bottomed out in early 2023 and have begun to rebound, despite high mortgage rates and fewer transactions in the secondary market.
The technical backdrop remains supportive, as demand eclipses supply in many geographies. Given this backdrop, rents may be pressured in pockets of the country, further emphasizing the need for the Fed to remain in restrictive territory for longer. A bottom-up approach is critical to monitoring risks and opportunities in real estate, as not all geographies will be resilient, evidenced by some slowdown in a few major cities.
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