Though we have settled into a more normalized rate and inflation macro backdrop, politics, policy and geopolitical developments add uncertainty to the outlook. It’s a big election year, with the Federal Reserve (Fed) widely expected to cut interest rates—the big questions being when, by how much, and whether the U.S. economy can avoid sliding into a recession. Historically, rate cuts that don’t precede recessions are very good for stocks and risk assets. We recently sat down with Paula Horn, Chief Investment Officer (CIO) for Brookfield’s Public Securities Group (PSG), to discuss what signals she’s watching as she helps PSG’s investment teams navigate their real asset strategies in today’s uncertain economic environment.

Rent inflation. January’s hotter-than-expected Consumer Price Index (CPI) measure of U.S. inflation sparked worries about a resurgence in recently cooling inflation and the willingness of the Fed to cut rates. The Fed has signaled that it must be confident that inflation is on track to meet its 2% inflation target before it begins cutting rates. However, according to Paula, an analysis of rent inflation shows why January’s CPI print was not a harbinger of heating-up inflation—and a delayed Fed rate cut.

While the CPI’s measure of rent inflation increased, CPI calculations for rental prices tend to lag more real-time price measures, Paula says. More importantly, the measure, owner’s equivalent rent, or OER, is widely acknowledged to be a flawed, imprecise gauge of true rents. Real-time data are showing a dramatic slowing in rent inflation that she expects will eventually show up in the CPI measure. In addition, she says January’s higher CPI shelter measure was likely month-to-month noise when viewed from a longer-term perspective, and February’s shelter measure declined. Finally, she notes that shelter makes up a much smaller percentage of the components of the Personal Consumption Expenditures Index (PCE), the Fed’s preferred inflation gauge, than the CPI. Notably, the six-month annualized Core PCE is now 2.5%—not at target, but very close.¹

Fiscal stimulus. Paula attributes the U.S. economy’s surprising economic resilience in 2023 at least partly to pro-cyclical U.S. fiscal policy, including stimulus designed to spur investment in infrastructure and renewable energy, student loan forgiveness and entitlement increases. She sees the contribution of fiscal stimulus and deficit spending to economic growth fading this year, although remaining at a decent enough level to delay a slowdown and help the U.S. economy avoid a recession in 2024. This is an election year, and tax cuts are coming. The same can’t be said of 2025, she says.

94 Redux? Did the Fed stick the soft landing? The short answer is it is still too early to claim victory. Historically, given the lagged impact of rate hikes on the economy, it often looks like a soft landing . . . until it isn’t. Reputations lead strategists to throw in the towel right before the economy actually does turn. In the recent past, the only time the Fed raised rates as aggressively without throwing the economy into recession was in 1994. Similarities do exist between the two periods. Productivity gains from artificial intelligence (AI), increases in real household disposable income, and full employment with healthy corporate profits do argue for hedging a bit of defensive positioning, especially in an election year.

¹ Source: Bloomberg

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