As the Federal Reserve’s interest rate hike cycle approaches its end, major investment banks have made predictions about the Fed’s rate-cutting path. Barclays latest forecast suggests that the Fed may cut rates four times next year, with a cumulative reduction of 100 basis points.
In a report released on Monday, the bank stated that the US economy will maintain resilience next year, which will make the Fed cautious in terms of rate cuts.
Currently, it is widely predicted that US economic growth will significantly slow down next year, with actual GDP annualized growth rates of only 0.4% in the first quarter and 0.3% in the second quarter, far below the average estimated value of 2.5% for 2023.
At the same time, job growth will also cool significantly. It is expected that by 2024, US inflation rates will decrease to near the Fed’s target of 2%. However, this means that although there is still a high possibility of an economic recession at present.
Barclays believes that market sentiment towards maintaining resilience in the US economy is overly pessimistic and an economy with resilience could push up inflation again. Meanwhile, despite declining trends during pandemic periods, excess savings are still sufficient to support consumer spending.
Maintaining economic resilience will also put pressure on US bond yields. Barclays predicts that by late 2024, average yields on ten-year US Treasury bonds will reach 4.5%, slightly higher than their current level of around 4.3%.
Fed may cut rates by 100 basis points next year
“Expectations are that starting from Q2 next year,the Federal Reserve would begin an easing cycle; cutting rates by a total of one hundred basis points through to end-2026,” said Barclays.
In other words,Barklays expects four rate cuts fromthe Federal Reserve next year,every time reducing themby twenty-five basis points.Compared to international peers,Barclays’ forecast is relatively conservative.
Analysts from ING predict that with the economic slowdown,the Federal Reserve will cut rates six times next year,with a cumulative reduction of 150 basis points.
Deutsche Bank economists warned at the end of last month that as the US economy enters a mild recession in the first half of next year,it is expected that the Fed will cut rates by fifty basis points in June 2024,marking the beginning of an easing cycle,and rate cuts next year could reach one hundred and seventy-five basis points.
As Wall Street’s boldest bank,UBS predicts that slowing US economic growth will prompt the Federal Reserve to cut rates by two hundred and seventy-five basis points before late 2024.
However,some investment banks are more conservative than Barclays. Goldman Sachs economists only expect one rate cut fromthe Federal Reserve in 2024,and it is most likely to occur in Q4 next year.The bank also recently pointed outthat financial markets have excessive expectations for rate cuts bythe Federal Reserve next year.