As the Federal Reserve's interest rate hike cycle approaches its end, major investment banks are making predictions about the Fed's interest rate cut path. Barclays predicts that the Federal Reserve may cut interest rates four times next year, with a cumulative reduction of 100 basis points.
In a report released on Monday, the bank stated that the US economy will remain resilient next year, which will make the Federal Reserve cautious in lowering interest rates.
At present, the market generally predicts that the US economic growth will significantly slow down next year, with an annualized real GDP growth rate of only 0.4% in the first quarter and 0.3% in the second quarter, far below the average estimated 2.5% in 2023.
At the same time, employment growth will also significantly cool down, and it is expected that by 2024, the US inflation rate will fall close to the Federal Reserve's target of 2%. However, this means that the United States may avoid an economic recession, although the likelihood of a recession remains high at present.
Barclays believes that the market is too pessimistic about the resilience of the US economy, and a resilient economy may push up inflation again. At the same time, although the excess savings during the epidemic have shown a downward trend, they are still sufficient to support consumer spending.
The economy's resilience will also put pressure on US bond yields. Barclays expects that by the end of 2024, the average yield of 10-year US treasury bond will reach 4.5%. This is an increase from the current level of slightly below 4.3%.
The Federal Reserve may cut interest rates by 100 basis points next year
"It is expected that the Federal Reserve will begin its easing cycle in the second quarter of next year, cutting interest rates by 100 basis points in 2024, another 100 basis points in 2025, and further lowering rates to the 2.75-3% level in 2026," Barclays said.
That is to say, Barclays expects the Federal Reserve to cut interest rates four times next year, each time by 25 basis points. Compared to predictions from international peers, Barclays' predictions are more conservative.
Analysts from ING predict that as the economy slows down, the Federal Reserve will cut interest rates six times next year, with a cumulative reduction of 150 basis points.
Deutsche Bank economists warned at the end of last month that as the US economy enters a mild recession in the first half of next year, the Federal Reserve is expected to cut interest rates by 50 basis points in June 2024, marking the beginning of the rate cutting cycle, with a rate cut of 175 basis points next year.
As the boldest bank on Wall Street, UBS predicts that a slowdown in US economic growth will prompt the Federal Reserve to cut interest rates by 275 basis points by the end of 2024.
However, there are also investment banks that are more conservative than Barclays. Goldman Sachs economists only expect the Federal Reserve to cut interest rates once in 2024, most likely in the fourth quarter of next year. The bank recently pointed out that the financial market's expectations for the Federal Reserve's interest rate cut next year are too high.