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The Fed will likely cut interest rates 4 times next year as the economy remains resilient

By Ray Lyon December 9, 2023

The Fed will likely cut interest rates 4 times next year as the economy remains resilient

Federal Reserve Chair Jerome Powell Testifies Before The Senate Banking Committee
Federal Reserve Board Chair Jerome Powell 
Kent Nishimura / Los Angeles Times via Getty Images

  • US economic growth will remain resilient next year, making the Fed cautious about rate cuts, Barclays said.
  • The Fed is expected to begin a “significant” easing cycle in the second quarter of 2024.
  • The central bank will likely cut by 100 basis points in 2024 and another 100 points in 2025.

US economy will remain resilient next year, making the Federal Reserve cautious about rate cuts, Barclays said in a Monday note.

To be sure, consensus forecasts indicate economic growth will slow sharply, with real GDP expanding at an annualized pace of just 0.4% in first quarter and 0.3% in second quarter, down from an estimated average of 2.5% in 2023.

Payroll gains will also cool significantly, and inflation is expected to fall to within striking distance of the Fed’s 2% target in 2024. Still, that means the US will avoid a recession, though the probability remains elevated.

“The Fed is forecast to begin a significant easing cycle in Q224 (markets are more aggressive relative to econ consensus), delivering 100bp cuts in 2024, another 100bp in 2025 and more in 2026 to a steady state rate of 2.75-3%,” Barclays said, summing up the consensus view.

Meanwhile, analysts at ING have predicted the Fed will deliver six rate cuts next year as the economy slows, amounting to 150 basis points.

And UBS sees even more aggressive cuts, saying slow economic growth would drive the Fed to cut rates by 275 basis points by the end of 2024.

For its part, Barclays said markets are too pessimistic about the economy’s continued resilience, which could fuel inflationary upside.

The PCE’s trajectory towards 2.5% inflation will require everything to go favorably in the economy, it added, but further GDP upside could disappoint this.

Meanwhile, although excess savings have trended down, they’re still high enough to prop up consumer spending.

The economy’s continued resilience will also bring back pressure on US bond yields, with the 10-year Treasury set to average 4.5% by 2024’s end. That’s up from the current rate of just below 4.3%.

Treasurys will also be impacted by re-emerging risk factors, which were made clear during last quarter’s bond market crash. These include an oversupply of Treasury assets, increased federal deficits, and loss of traditional market buyers.

The outcome of the US presidential election will play a role in where long-dated yields land, given how the elected leader approaches fiscal policy.

“Should it look like one party will end up controlling the White House and Congress, that would be seen as increasing the likelihood of fiscal expansion, either via higher spending or lower taxes,” Barclays wrote. “A 1pp of GDP increase in budget deficits over the next 10 years would increase the fair value of 10y yields by 25-50bp.”

Introduction: In the ever-evolving realm of economic dynamics, Barclays provides a compelling outlook on the United States’ economic resilience in the coming year, shedding light on the Federal Reserve’s cautious stance on rate cuts. Against a backdrop of varying forecasts, this blog post delves into the nuanced perspectives surrounding the expected trajectory of the US economy, the Federal Reserve’s role, and the potential impact on key financial indicators.

Barclays’ Forecast: A Cautious Fed in the Face of Resilience: According to Barclays, the US economy is poised to remain resilient in the upcoming year, challenging the prevalent narrative of an imminent slowdown. While consensus forecasts anticipate a notable deceleration in economic growth and a cooling of payroll gains, Barclays suggests that the Federal Reserve will exercise caution in implementing rate cuts, predicting a “significant” easing cycle commencing in the second quarter of 2024.

Market Expectations and Divergent Views: Divergence exists in market expectations, with Barclays projecting a series of 100-basis-point cuts in 2024 and 2025, while analysts at ING anticipate six rate cuts, totaling 150 basis points. UBS takes a more assertive stance, foreseeing a 275-basis-point reduction by the end of 2024. Amidst these varying outlooks, the blog explores the factors influencing these predictions and their potential implications on the broader economic landscape.

Challenges and Opportunities: Inflation, Bond Yields, and Risk Factors: Barclays contends that markets may be overly pessimistic about the economy’s resilience, potentially underestimating inflationary pressures. The post delves into the factors contributing to this perspective, including the Personal Consumption Expenditures (PCE) trajectory, excess savings, and the impact on bond yields. Additionally, the blog explores how external elements, such as the US presidential election and associated fiscal policies, could shape the future direction of long-dated yields.

Conclusion: As we stand at the precipice of economic change, this blog post seeks to unravel the complex web of factors influencing the Federal Reserve’s decisions and the market’s response. From contrasting forecasts to the impact of political events, readers will gain valuable insights into the potential trajectory of the US economy and its implications for investors and policymakers alike.

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