Economists at Morgan Stanley predict the Federal Reserve will cut interest rates sharply over the next two years as inflation cools, while analysts at Goldman Sachs Group Inc. expect fewer cuts and a later start.
The central bank will start cutting rates in June 2024, then again in September and at each meeting starting in the fourth quarter, in 25-basis-point increments, Morgan Stanley researchers led by chief U.S. economist Ellen Zentner said in their 2024 outlook on Sunday. That’ll bring the federal funds rate down to 2.375% by the end of 2025, they said.
Goldman Sachs, meanwhile, sees the first 25 basis point cut in the fourth quarter of 2024, followed by one cut per quarter until mid-2026 – a total of 175 basis points, with rates settling in a target range of 3.5% to 3.75%. That’s according to a 2024 outlook by economist David Mericle, also published on Sunday.
Goldman Sachs’ forecasts are closer to the central bank’s. The Fed’s September projections called for two quarter-point cuts next year and a federal funds rate of 3.9% by 2025, according to the median estimate of policymakers. Fed governors and regional bank presidents will update their forecasts at next month’s meeting.
The Morgan Stanley team sees a weaker economy that warrants a greater degree of easing, but not a recession. They expect unemployment to peak at 4.3% in 2025, compared with the Fed’s estimate of 4.1%. Growth and inflation will also be slower than officials expect.
Here are some of Morgan Stanley’s and Goldman Sachs’ forecasts for 2025, compared with the median of Fed officials’ projections in September:
“Prolonged high interest rates create a persistent drag that more than offsets the fiscal stimulus and brings growth persistently below potential starting in 3Q24,” Zentner’s group said in its report. “We maintain our view that the Fed will achieve a soft landing, but weakening growth will keep recession fears alive.”
The US should stave off a downturn as employers hold on to workers even as hiring slows, Morgan Stanley said. This will weigh on disposable income and therefore spending, it said.
The team also expects the central bank to start phasing out quantitative tightening next September until it ends in early 2025. They see the Fed reducing the maturity caps on Treasuries by $10bn a month and continuing to reinvest mortgages into Treasuries.
Goldman Sachs expects the Fed to keep rates relatively high due to a higher equilibrium rate, as “post-financial crisis headwinds are behind us” and larger budget deficits are likely to persist, boosting demand.
“Our forecast could be seen as a compromise between Fed officials who see little reason to keep the fed funds rate high once the inflation problem is solved and those who see little reason to stimulate an already strong economy,” Goldman’s Mericle wrote.
