UBS anticipates the Federal Reserve will implement significant interest rate cuts in 2024, predicting a decrease of up to 275 basis points, far exceeding the market consensus. This move is expected as the U.S. economy potentially enters a recession. Despite a resilient economy through 2023, UBS foresees a weakening economic output in 2024 due to disinflation and rising unemployment, leading to rate cuts by the Federal Open Market Committee (FOMC).
Since March 2022, the FOMC has raised rates from 0.25-0.5% to 5.25-5.5% through 11 rate hikes. Although the central bank paused rate hikes, markets speculate on future cuts. However, Fed Chairman Jerome Powell expressed uncertainty about achieving the 2% inflation target.
UBS’s analysis highlights the increasing strain on the economy from higher interest rates, tightening credit and lending standards, and lower revisions in labor market income. The bank predicts slower growth in 2024, an unemployment rate nearing 5% by year-end, and the federal funds rate target range dropping to 2.50%-2.75%.
Economic contraction is expected around mid-2024, with GDP growth slowing to just 0.3%. UBS forecasts a recovery driven by monetary policy easing in 2025, pushing GDP growth back up to approximately 2.5% and capping the unemployment peak at 5.2% in early 2025. The bank also anticipates a fiscal consolidation-induced slowdown in 2026.
Highlighting worsening initial conditions compared to a year ago, UBS’s Arend Kapteyn emphasized the significant credit withdrawal from the U.S. economy, leading to margin compression and potential layoffs. The gap between real incomes and spending indicates a scope for spending reduction.
Contrasting UBS’s outlook, Goldman Sachs maintains a more optimistic view, projecting a 2.1% U.S. economic expansion in 2024. They cite strong real income growth, an improving global industrial cycle, and gradual inflation targeting as factors supporting this growth, suggesting the Fed may maintain current rates.