- The Federal Reserve is ready to shock markets with aggressive rate of interest cuts subsequent yr, in line with UBS.
- UBS mentioned gradual financial progress will drive the Fed to chop charges by 275 foundation factors by the tip of 2024.
- “We expect substantially slower growth in 2024, a rising unemployment rate, and meaningful reductions in the federal funds rate,” UBS mentioned.
The Federal Reserve goes to shock buyers subsequent yr by aggressively chopping rates of interest amid a slowing economic system, in line with UBS’ 2024 financial outlook.
The agency mentioned it expects financial progress to gradual significantly subsequent yr after this yr’s brisk tempo of progress, and that ought to result in diminished retail spending, a worsening client steadiness sheet, and a continued rise within the unemployment price.
“We expect economic growth to slow sharply in the next few quarters, with a mild contraction worth half a percentage point in the middle of the year,” UBS mentioned in a Monday notice.
Over the course of the entire yr, the agency expects GDP to develop simply 0.3% in 2024, representing a marked slowdown from the three% achieve over the previous 4 quarters.
Meanwhile, UBS expects the unemployment price to rise greater than a full proportion level from present ranges to five.0% on the finish of subsequent yr. By March, the Fed will begin to barely tweak charges decrease.
“However, as the slowdown in the economy and the extra disinflationary leg begin in earnest, we expect the Fed in the second half of the year to turn to full-on accommodation, with more rate reductions, in line with what it has done historically.”
UBS mentioned it expects the Fed to chop charges by 275 foundation factors, leaving the efficient federal funds price at 2.50%-2.75%. The Fed presently has charges set at 5.25% to five.50%.
That’s properly forward of market expectations, in line with knowledge from the CME Fed Watch Tool, which expects simply 75 foundation factors of cuts in 2024 that may ship the fed funds price to 4.50%-4.75%.
Driving UBS’ sharp estimate for a discount in rates of interest is their expectation that disinflation will proceed all through 2024, giving the Fed confidence that inflation has been tamed amid slowing financial progress.
UBS expects the Fed to get severe about chopping rates of interest in 2024, and mentioned {that a} lack of fiscal coverage help from Washington, DC, will drive the Fed to maneuver ahead with the rate of interest cuts.
“The historically wide budget deficit, a coming presidential election, and a fractured political landscape to us implies little room for cyclical fiscal support,” UBS defined.
