The Federal Reserve will shock investors next year by aggressively cutting interest rates amid a slowing economy, according to UBS’s 2024 economic outlook.
The firm said it expects economic growth to slow sharply next year after this year’s brisk pace, leading to lower retail spending, a deteriorating consumer balance sheet and a further rise in the unemployment rate.
“We expect economic growth to slow sharply over the next few quarters, with a mild contraction of half a percentage point in the middle of the year,” UBS said in a note on Monday.
For the year as a whole, the firm expects GDP to grow by just 0.3 per cent in 2024, a marked slowdown from the 3 per cent gains of the past four quarters.
Meanwhile, UBS expects the unemployment rate to rise by more than a full percentage point from current levels to 5.0% by the end of next year. By March, the Fed will start to tweak rates slightly lower.
“However, as the economic slowdown and the additional disinflationary leg begin in earnest, we expect the Fed to turn to full-blown accommodation in the second half of the year, with further rate cuts, in line with what it has done in the past.”
UBS said it expects the Fed to cut rates by 275 basis points, leaving the effective federal funds rate at 2.50%-2.75%. The Fed currently has rates set at 5.25%-5.50%.
That’s well above market expectations, according to data from the CME Fed Watch tool, which expects just 75 basis points of cuts in 2024, taking the fed funds rate to 4.50%-4.75%.
Driving UBS’s high estimate for a rate cut is its expectation that disinflation will continue throughout 2024, giving the Fed confidence that inflation has been tamed amid slowing economic growth.
UBS expects the Fed to get serious about cutting rates in 2024, and said that a lack of fiscal support from Washington, DC, will drive the Fed to move forward with rate cuts.
“The historically large budget deficit, an upcoming presidential election and a fractured political landscape suggest to us little room for cyclical fiscal support,” UBS said.
