- After nearly two years of aggressive rate hike cycles, the Fed is expected to begin lowering rates in 2024.
- Easing inflation and economic resilience suggest the Fed could cut rates several times.
- Here’s what Wall Street expects the Fed to do next year when it comes to key inputs to the U.S. stock market and economy.
Interest rates have soared since early 2022 as the Federal Reserve sought to subtly rein in inflation without disrupting the economy by raising interest rates.
Since its last rate hike in July, the Fed appears to have made steady progress toward lowering inflation without negatively impacting the labor market or the broader economy. As a result, many Wall Street analysts are predicting a significant rate cut next year.
No matter what the Fed does with monetary policy in 2024, investors will need to pay close attention to interest rates, as they are a key input to the overall economy and stock market valuations. The Fed’s rate cuts are also important for consumers, as they are likely to lead to lower interest rates on mortgages and auto loans.
Here’s a look at what Wall Street expects the Fed to do regarding interest rates in 2024.
UBS: Fed cuts interest rates by 275 basis points
According to UBS, the U.S. economy will enter a recession in 2024, which will trigger the Fed to cut rates aggressively next year.
The Swiss bank said in a note last month that it expects the Fed to cut interest rates by 275 basis points next year, which equates to a whopping 11 cuts by the Fed, assuming each cut is 25 basis points.
UBS said the Fed’s rate cut would be “in response to the expected U.S. economic recession in the second and third quarters of 2024 and the continued slowdown in headline and core inflation.” UBS expects rate cuts to begin during the Fed’s March FOMC meeting.
Macquarie: Fed plans to cut interest rates by 225 basis points
The combination of rising interest rates and the quantitative tightening policy the Fed is using to reduce the amount of bonds it holds on its balance sheet means financial conditions are much tighter than it appears on the surface. ing. The San Francisco Fed’s proxy federal funds rate is currently 6.7%.
This fact, coupled with the fact that inflation is likely to continue to decline due to slower rent growth, has McCauley suggesting the Fed will cut interest rates by 225 basis points next year.
“The Fed has not yet abandoned the ‘secular high’ view it adopted in late September. However, we and our economists believe the federal funds rate could be cut by -225 basis points in 2024.” McCauley said in the memo. on friday.
ING Economics: Fed cuts interest rates by 150 basis points
Slowing inflation, a cooling job market and a deteriorating outlook for consumer spending could force the Fed to cut interest rates more than the market expects.
“Moderate growth, lower inflation and a cooling labor market are exactly what the Fed wants,” James Knightley, chief international economist at ING, said in a note last month. “While this should confirm that there is no need for further Fed policy tightening, the outlook is becoming increasingly unfavorable.”
Knightley said he expects the Fed to begin cutting rates in the second quarter of next year, with up to six 25-basis point cuts totaling 150 basis points. He also predicted that interest rate cuts would be extended through 2025, with at least four 25 basis point rate cuts.
Market: Investors expect Fed to cut interest rates by 125 basis points
by CME’s FedWatch Tool, futures markets are pricing in a total rate cut of 125 basis points next year. If that happens, the federal funds rate will range from 4.00% to 4.25%, compared to the current 5.25% to 5.50%.
Barclays: Fed cuts interest rates by 100 basis points
The Fed will be wary of cutting interest rates too much next year as the economy continues to recover, according to a Monday note from Barclays.
The company expects the Fed to cut rates by 100 basis points next year and another 100 basis points in 2025.
Barclays said investors were too pessimistic about the economy’s continued resilience, which could fuel a rebound in inflation. As a result, the Fed may be delayed in cutting interest rates through 2024, the memo said.
Fed: Fed expects to cut interest rates by 25 basis points
The median forecast in the Fed’s latest interest rate dot plot chart released in September puts the federal funds rate at 5.1% at the end of 2024, which would mean only one 25 basis point rate cut for the entirety of next year. means. If that happens, the market could be ahead of expectations for a rate cut, which could ultimately lead to volatility in the stock market.
The Fed is scheduled to update the dot plot chart at next week’s FOMC meeting, with the median forecast for next year’s Fed rate cut expected to jump 50 basis points.
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