Changing economic forecasts are clouding the 2024 investment outlook, but one major concern seems to be fading away: the fear that inflation would keep rising even if the economy shifted into reverse.

Forecasts for the next few months are in flux as the U.S. Federal Reserve fails to give clear guidance about where interest rates are headed and said decisions will be based on data–which, in turn, offer mixed signals.

Consumer-price increases seem unlikely to resume the fast pace of a year ago and the economy doesn’t look headed to a sharp contraction, several forecasters said. That puts to rest worries that the U.S. would go through a period of stagflation, or the coincidence of high inflation with economic recession.

“That seems to be off the table,” said BCA Research Chief Strategist Doug Peta.

That’s a sharp turn from just a few months ago. In July, Louis Navellier, from Navellier & Associates, wrote that persistent inflation would “leave the Fed’s foot on the breaks and may be steering us to a classic stagflation scenario.”

Since then, core PCE inflation, considered the Fed’s preferred gauge, has slowed to 3.7% in September, from June’s 4.6% pace. The economy keeps showing signs of resilience, leading Navellier to forecast a healthy 3.5% growth in gross domestic product next year.

“Stagflation is a risk if interest rates stay high, but a lot of folks will spend as rates come down,” he said in a recent email. “So I am not in the stagflation camp, since I am anticipating improving GDP growth in 2024.”

Not everybody is ready to disregard the possibility, though. Stagflation “certainly is a risk,” said Gregory Faranello, Head of U.S. Rates at AmeriVet. “Yes, things are slowing. The hope is that inflation continues to slow along with that but there’s a risk it doesn’t.”

Faranello says few would benefit from stagflation. The Fed would keep short-term rates high and cash would pile up in the money market, in a scenario “likely not friendly toward equity valuations [and] not terrible for fixed income.”

It remains unclear how long it will take for inflation to slow down enough so the Fed could start cutting rates.

Richmond Fed President Tom Barkin in a recent CNBC interview forecast that “inflation is coming down, but it’s going to come down stubbornly. And I think we will in the end have some sort of a slowdown here,” because of how much rates have gone up. Barkin said he wasn’t forecasting stagflation, though.

Fed-fund futures indicate investors expect cuts to start at the FOMC’s March 24 meeting, an outlook many economists consider too rosy.

“Market expectations moved skittishly from recession to ‘soft landing’ to overheating and back again (and again),” BNP Paribas global head of multi-asset Maya Bhandari said. “We do see the risk of a more material slowdown in the US economy, but I would err on the recession (weaker growth and weaker inflation) than the stagflation (weaker growth and higher inflation) camp.”

Bhandari added that the scenario she foresees could benefit bonds and not so much equities.

“Being long of duration is our highest conviction view – expressed in a diversified way via long positions in long-dated U.S. real yields, E.U. investment grade corporate bonds (that we own unhedged), [emerging market] local bonds and a smidgen of U.S. nominals,” she said. “We are modestly cautious of equities.”

Peta, from BCA Research, said the Fed is likely to keep monetary conditions tight until it becomes clear the labor market is easing.

“I think the Fed is going to be very careful about stirring long hibernating inflation expectations,” Peta said.

Keeping rates high for too long could, in theory, stoke the stagflation scenario, but Peta says he expects Fed officials to closely monitor indicators and eventually be able to avoid that. He is among forecasters anticipating a “mild” recession, rather than a disastrous stagflation.

By: Paulo Trevisani (paulo.trevisani@wsj.com)