Interest rates shot up as the Federal Reserve tried to carefully control inflation and balance out the economy, since 2022.
Following its interest rate increase in July, the Fed appears to have successfully reduced inflation without harming the job market and overall economy.
As a result, numerous Wall Street analysts are now predicting substantial interest rate reductions in the coming year.
Regardless of the Fed’s actions on monetary policy in 2024, investors must stay vigilant since interest rates play a vital role in the overall economy and stock market valuations.
This also holds significance for consumers, as any interest rate cuts by the Fed are likely to result in lower mortgage and auto loan rates.
UBS Forecasts Aggressive Interest Rate Reductions
UBS predicts that the US economy will enter a recession in 2024, prompting the Fed to take aggressive measures by cutting interest rates next year.
In a note last month, the Swiss bank mentioned that it anticipates the Fed making substantial moves by cutting rates by 275 basis points next year.
This would mean a significant 11 interest rate cuts, assuming each cut is 25 basis points.
According to UBS, the Fed’s anticipated cuts are a reaction to the projected US recession in Q2-Q3 2024 and the ongoing deceleration in both headline and core inflation.
UBS predicts that these interest rate reductions will likely commence during the Fed’s March FOMC meeting.
Due to the combination of elevated interest rates and the Fed’s quantitative tightening strategies, aimed at reducing its bond holdings, monetary conditions are significantly tighter than they may seem.
Currently, the San Francisco Fed’s proxy Fed Funds rate stands at 6.7%.
Macquarie Predicts Significant 225 Basis Point Cut in 2024
Taking into account the tightening monetary conditions and a probable ongoing decrease in inflation due to slowing rent increases, Macquarie suggests that the Fed is likely to implement a substantial 225 basis points interest rate cut next year.
In a note on Friday, Macquarie stated,
“The Fed hasn’t yet abandoned its ‘high for long’ narrative adopted in late September. But we and our economists are of the view that we may see the Fed Funds rate cut by -225bps in 2024.”
With inflation moderating, a slowing job market, and a less optimistic outlook for consumer spending, the Fed might find it necessary to cut interest rates beyond what the market currently anticipates.
Economists Have Varied Views on Interest Rate Reductions
In a note last month, ING’s chief international economist, James Knightley, highlighted,
“We have modest growth and cooling inflation and a cooling labor market — exactly what the Fed wants to see. This should confirm no need for any further Fed policy tightening, but the outlook is looking less and less favorable.”
According to Knightley, he anticipates the Fed initiating interest rate cuts in the second quarter of next year, with the possibility of up to six 25-basis-point cuts totaling 150 basis points.
Furthermore, he foresees these interest rate cuts extending into 2025, with at least four additional 25-basis-point cuts.
The CME’s FedWatch Tool indicates that futures markets are currently pricing in rate cuts amounting to 125 basis points for the next year.
If realized, this would position the Fed Funds rate within a range of 4.00%-4.25%, in contrast to the present range of 5.25%-5.50%.
Barclays suggests that the Fed’s caution will be influenced by the ongoing resilience in the economy next year, leading them to avoid aggressive interest rate cuts.
According to the firm’s Monday note, they anticipate the Fed making a 100 basis points cut next year, followed by another 100 basis points of cuts in 2025.
Barclays Warns Against Pessimism as Market Braces for Volatility
Barclays contends that investors may be overly pessimistic about the sustained resilience of the economy, potentially contributing to a resurgence of inflation.
This perception could lead the Fed to adopt a cautious approach, resulting in a slower pace of interest rate cuts throughout 2024, as mentioned in the note.
The Fed’s recent interest rate dot plot chart, released in September, indicates a median projection placing the Federal Funds Rate at 5.1% by the end of 2024.
This projection suggests only one 25 basis point interest rate cut for the entire next year. If accurate, the market’s anticipation of multiple rate cuts could lead to significant volatility in the stock market.
Anticipations for the upcoming FOMC meeting suggest that the Fed’s updated dot plot chart may show a median forecast of 50 basis points in interest rate cuts for next year.
This would represent an increase from the previous projection and could impact market expectations.