ING Economics released a report on Thursday stating that the US economy is showing clear signs of slowing down, which means that the Federal Reserve will cut interest rates at least six times by 2024.
Currently, futures markets suggest that the Federal Reserve will cut interest rates by 125 basis points next year.
According to James Knightley, Chief International Economist at ING Economics, inflation slowdown, cooling job market, and deteriorating consumer spending prospects mean that the Federal Reserve will need to cut interest rates by a larger magnitude than expected by the market.
“Economic growth is moderate, inflation is cooling down, and labor market is cooling down. This is what the Federal Reserve wants to see,” said Knightley. “This should confirm that there is no need for further tightening of policies by the Federal Reserve, but the outlook seems increasingly pessimistic.”
Knightley stated that the US job market has clearly cooled down. Although initial claims for unemployment benefits remain stable at low levels each week, continued claims for unemployment benefits are increasing. He pointed out that fundamentally this signals companies’ reluctance to lay off workers but also their hesitancy in hiring new workers. In other words, more evidence suggests a cooling rather than a collapse in the labor market.
Data released on Thursday showed an increase of 7,000 people in initial claims for unemployment assistance in the week ending November 25th in the United States to reach 218 thousand people. As of November 18th week, continuing claims for unemployment assistance rose to 1.93 million people reaching its highest level since November 2021.
Knightley also mentioned that although consumer spending remains steady currently it will face a tougher road ahead in 2024 as real disposable household income shows signs of weakness and credit card delinquency rates rise while student loan payments further intensify pressure.
Federal Reserve may cut interest rates six times next year
Knightley expects that starting from Q2 next year; the Federal Reserve will cut interest rates six times, each time by 25 basis points, totaling 150 basis points. In addition, there will be at least four rate cuts of 25 basis points in 2025.
Knightley’s expected rate cuts would bring the effective federal funds rate to around 3.83% by the end of 2024 and to around 2.83% by the end of 2025, compared to the current rate of 5.33%.
It is worth noting that although Knightley’s expectations for rate cuts are higher than market consensus, he is not the most aggressive analyst on Wall Street.
As one of Wall Street’s boldest investment banks, UBS predicted last month that with the Federal Reserve shifting towards a “fully accommodative” mode, interest rates could be cut by at least 275 basis points by the end of next year.
Knightley’s expectation for gradual interest rate cuts by the Federal Reserve is encouraging because it indicates that the US economy will maintain resilience. When the US economy slows down significantly and enters a recession, patience with interest rate cuts from the Federal Reserve tends to diminish.