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2024 SEI ® Data as of 12/31/2023 unless otherwise indicated. 10 and ourselves centers on the path of inflation. We remain doubtful that inflation will fall smoothly toward 2% by 2026 for the reasons previously cited. Consistent with the Fed's benign assessment of the economic outlook, the central bank sees three federal-funds rate decreases next year, to 4.6%, four additional cuts in 2025, and more reductions in 2026 to 2.9%. Traders in the futures market appear even more optimistic than the Fed, pricing in 150-basis points (1.50%) of cuts in the federal-funds rate by the end of 2024. In contrast, we lean much closer to the Fed's view, penciling in three 25-basis point reductions. It all depends, of course, on how strong the economy stays and whether inflation stabilizes or even backs up a bit from current levels. At this point, we question whether any rate cuts are really needed. Exhibit 14 tracks the Chicago Federal Reserve's National Financial Conditions Index (NFCI), which tracks more than 100 financial-activity variables measuring risk, credit, and leverage. Positive values of the NFCI have been associated with financial conditions that are tighter than the historical average, while negative values signal that financial conditions are easier than average. By this measure, financial conditions actually have been easing since October 2022, reflecting the strength of the equity market and the tightening of credit spreads. With the recent decline in bond yields, the index has eased even further to a level that is consistent with economic expansion and a low level of financial stress. So far, the tightening of bank lending standards following the collapse of Silicon Valley Bank and a few other banking institutions in March 2023 has had an impact limited to those companies that are either too small or too financially weak to tap the capital markets. Exhibit 14: Financial stress? What stress? Source: Federal Reserve Bank of Chicago, National Bureau of Economic Research, SEI. Fed Chair Jerome Powell and other Fed officials maintain that monetary policy is now restrictive and inflation is down for the count. While we think these are debatable points, they provide the rationale to ease monetary policy at a time when the U.S. economy is at full employment and is still chugging along at a reasonable pace. In our view, the Fed's rhetoric is simply adding fuel to investors' enthusiasm. Other central banks appear to be taking a more conservative tack. Both the BOE and the European Central Bank (ECB) insist that the job of vanquishing inflation is not done. Not surprisingly, given the U.K.'s higher inflation rate, the BOE's rhetoric is more aggressive; the central bank seems to be preparing the ground for a "hard landing," which occurs when a country's economy rapidly shifts from growth to slow growth to flat as it approaches a recession. One possible scenario: The BOE will be more hesitant to cut rates, lagging the Fed, the ECB, and the Bank of Canada. However, as the economy weakens, we believe that the pace will pick up, forcing the BOE to cut policy rates more aggressively than other central banks during the second half of 2024. The ECB also is pushing back on the idea that rate cuts are coming soon. ECB President Christine Lagarde and her colleagues are wary that the rising trend in labor costs will become more embedded into prices, as it apparently has done in the U.K. In addition, Germany is facing a spike in CPI inflation as government energy subsidies end. Japan and China remain important outliers among global economies. Despite intense speculation over the timing of a move away from negative policy rates and yield-curve control, the Bank of Japan (BOJ) has maintained the status quo, rising inflation notwithstanding. The deflation and poor economic performance since the early 1990s is burned deeply into the country's psyche. Policy-makers still cannot believe that the inflation trend is truly sustainable. Like many other observers, SEI expects the BOJ to begin the normalization of interest rates in 2024. The timing remains a key unknown. The Bank of China, on the other hand, has an immediate problem. The debt woes of the property sector and provincial governments are a malady that is not easily treated by monetary policy alone. Consumer prices fell 0.5% over the 12-month period -2 -1 0 1 2 3 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 Above 0 = Tighter-than-average financial conditions National Financial Conditions Index U.S. Recessions National Financial Conditions Index

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