US Federal Reserve Chairman Jerome Powell asks questions from reporters during a press conference after announcing the Fed policy decision to leave interest rates unchanged at the Federal Reserve in Washington, US on September 20, 2023.
Evelyn Hockstein | reuters
UBS expects the US Federal Reserve to cut interest rates by up to 275 basis points in 2024, nearly four times the market consensus, as the world’s largest economy heads into recession.
In its 2024-2026 outlook for the US economy published on Monday, the Swiss bank said that despite economic resilience, many of the same headwinds and risks will persist through 2023. Meanwhile, the bank’s economists suggested that “the support for growth that was able to overcome those constraints in 2023 will continue into 2024.”
UBS expects deflation and rising unemployment to weaken economic output in 2024, leading the Federal Open Market Committee to cut rates “to prevent the nominal funds rate from becoming increasingly restrictive as inflation declines first, And to prevent economic weakness later in the year.”
Between March 2022 and July 2023, the FOMC made 11 rate hikes to take the fed funds rate from its target range of 0%-0.25% to 5.25%-5.5%.
The central bank has since remained at that level, leading the market to mostly conclude that rates have peaked, and to begin speculating on the timing and scale of future cuts.
However, Fed Chairman Jerome Powell said last week that he was “not confident” that the FOMC has yet done enough to get inflation permanently back to its 2% target.
UBS noted that despite the most aggressive rate-hike cycle since the 1980s, real GDP grew by 2.9% at the end of the third quarter. However, yields have risen and stock markets have come under pressure since the September FOMC meeting. The bank believes this has rekindled growth concerns and shows that the economy is “not yet out of the woods.”
UBS highlighted, “The expansion carries the growing burden of higher interest rates. Credit and lending standards appear to be tightening beyond mere revaluations. Labor market earnings remain less revised over time.”
“According to our estimates, spending in the economy appears to have increased relative to income, boosted by fiscal stimulus and maintained at that level by excess savings.”
The bank estimates the pressure on growth from fiscal stimulus in 2023 will ease next year, while household savings are “dwindling” and balance sheets look less strong.
UBS said, “Furthermore, if the economy does not slow significantly, we remain skeptical that the FOMC will restore price stability. 2023 performed better as many of these risks failed to materialize. However, this does not mean That they have been eliminated.”
“In our view, the private sector looks less insulated from the FOMC’s rate hikes next year. Looking ahead, we expect significantly slower growth, rising unemployment rates and meaningful cuts in the federal funds rate in 2024, with the target range ending between 2.50% and 2.75%.”
UBS expects the economy to shrink by half a percentage point in the middle of next year, with annual GDP growth slowing to just 0.3% in 2024 and unemployment rising to nearly 5% by the end of the year.
“With that additional disinflationary impulse, we expect monetary policy easing next year to lead to a recovery in 2025, lifting GDP growth to about 2-1/2%, with unemployment falling by early 2025.” Rates will narrow to 5.2%. We expect some slowing in 2026, partly due to anticipated fiscal consolidation,” the bank’s economists said.
The worst debt impulse since the financial crisis
Arend Kapten, UBS’s global head of economics and strategy research, told CNBC on Tuesday that starting conditions are “much worse now than they were 12 months ago,” especially as the “historically large” amount of loans that have to be repaid. is being taken. American economy.
“Credit impulses are now at their worst level since the global financial crisis – we think we’re seeing that in the data. You’ve got margin compression in the US which is a good precursor to layoffs, so US margins are more subdued. There is pressure on the entire economy compared to Europe, for example, which is surprising,” he told CNBC’s Joumanna Beresche on the sidelines of the UBS European conference.
Meanwhile, private payrolls pre-health care are growing close to zero and some of the 2023 fiscal stimulus is being phased out, Kapten said, also reiterating the “huge gap” between real income and spending that means “ There is a lot of room for “spending to fall toward those income levels.”
“The answer that people have is that they say ‘Why aren’t income levels rising, because inflation is falling, real disposable income should be improving?’ But in the US, debt service for households is now growing faster than real income growth, so we basically think there’s room for a few negative quarters in the middle of next year,” Kapten argued. Gave.
Recession in many economies is characterized by two consecutive quarters of contraction in real gross domestic product. In the US, the National Bureau of Economic Research Business Cycle Dating Committee defines a recession as “a significant decline in economic activity that is widespread throughout the economy and that lasts more than a few months”. It takes into account the overall assessment of the labor market, consumer and business spending, industrial production and income.
Goldman remains ‘very confident’ about US growth outlook
UBS’s outlook on both rates and growth is well below market consensus. Goldman Sachs estimates the US economy will grow 2.1% in 2024, outpacing other developed markets.
Kamakshya Trivedi, head of global FX, rates and EM strategy at Goldman Sachs, told CNBC on Monday that the Wall Street giant was “pretty confident” in the US growth outlook.
“Real income growth looks quite strong and we think this will continue. The global industrial cycle, which has been quite soft this year, we think is showing some signs of deceleration, with some are also included.” Asia, so we feel quite confident about it,” he told CNBC’s “Squawk Box Europe.”
Trivedi pointed to some recent dovish comments from Fed officials, saying that with inflation gradually returning to target, monetary policy could become a little more accommodative.
“I think the combination of things – policy easing, the strong industrial cycle and real income growth – makes us quite confident that the Fed can hold on to this plateau,” he concluded.
Correction: Between March 2022 and July 2023, the FOMC made 11 rate hikes to take the fed funds rate from its target range of 0%-0.25% to 5.25%-5.5%. The earlier version had misstated the limit.
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