On Monday, both Bank of America and Deutsche Bank shared their views about the Fed rate cuts. They anticipate the Fed to cut rates next year. They expect borrowing costs to go down.
BofA anticipates inflation slowdown to lead to Fed rate cuts
According to Bank of America’s global research economists, they anticipate an inflation slowdown worldwide. This could lead central banks to lower interest rates in the latter part of 2024. Their goal remains to prevent a global recession from happening.
“2023 defied almost everyone’s expectations,” remarked Candace Browning, head of BofA Global Research. Contrary to predictions, the recession didn’t occur, Fed rate cuts didn’t happen, and bond markets remained relatively stable, except for brief, intense episodes. Additionally, the upward movement of equities caused discomfort for many investors who had chosen to stay cautiously underweight.
For 2024, BofA economists anticipate central banks achieving an inflation slowdown with a soft landing, says Browning. However, it’s important to acknowledge that there are more potential risks than opportunities.
Michael Gapen, the head of US economics at the bank, anticipates initially the Fed to cut rates in June. He foresees a pattern of the central bank reducing rates by 25 basis points each quarter.
Deutsche Bank forecasts the Fed to cut rates in a less optimistic manner
Deutsche Bank’s economists, in their 2024 outlook, foresaw a similar timing for Fed rate cuts, yet their depiction of the situation was a bit less optimistic.
The German bank anticipates the US entering a “mild recession” in the first half of 2024.
This economic scenario is expected to prompt the Federal Reserve to implement more aggressive rate cuts than what is currently reflected in market expectations.
Deutsche Bank anticipates an initial reduction of 50 basis points during the Fed’s June 2024 meeting, with the expectation of further cuts totaling 125 basis points throughout the remainder of the year.
Deutsche Bank foresees two consecutive quarters of economic contraction in the first half of 2024.
According to Brett Ryan, the bank’s senior US economist, this is anticipated to result in a notable increase in the unemployment rate, rising to 4.6% by the middle of next year from its current rate of 3.9%, as shared in an interview with Reuters.
Given the current Fed rate range of 5.25%-5.5%, Deutsche Bank’s projected Fed rate cuts to bring it down to 3.5%-3.75% by the year’s end.
In contrast, market data from LSEG indicates that traders are currently estimating a rate of 4.48% by December 2024.
Federal Reserve navigating inflation with aggressive interest rate hikes
Over the past year, the Federal Reserve has implemented a series of 11 sharp interest rate hikes, aiming to combat inflation and temper economic growth.
In a rapid span of only 16 months, interest rates escalated from nearly zero to surpass 5%, marking the swiftest tightening since the 1980s.
Earlier this month, Fed Chair Jerome Powell indicated the possibility of additional rate hikes, citing a current inflation rate of 3.7% compared to the same period last year. Although lower than the peak of 9.1% in June 2022, it remains significantly above the targeted rate of 2%.
Nevertheless, Powell acknowledged the positive trajectory of the economy. Despite a year-over-year increase of 3.2% in the Consumer Price Index for October, a slight decrease from the 3.7% reading the previous month, Powell expressed a lack of recession forecasts for the current year.
He emphasized the evolving balance between the risks of taking too much action versus too little, stating, “The risk of doing too much versus the risk of doing too little are getting closer to balance.”