Wall Street banks split on interest rate forecasts for 2024

Here’s what major Wall Street banks are expecting from U.S. interest rates next year

Interest rates in the United States have soared since the beginning of 2022, as the U.S. Federal Reserve (Fed) aimed to carefully manage inflation without disrupting the overall economy through rate hikes.

Following its most recent interest rate hike in July, it appears that the Fed has achieved substantial progress in mitigating inflation without adversely affecting the labor market and the broader economy.

This success has led many analysts on Wall Street to predict significant interest rate reductions in the upcoming year. Just last week, the Fed hinted at interest rate reductions in surprisingly dovish commentary, sending stock markets and indices to new record highs. “We’re aware of the risk that we would hang on too long,” said Fed Chair Jay Powell said, referring to waiting too long to cut rates. “We know that’s a risk and we’re very focused on not making that mistake.”

Regardless of the specific actions the Fed takes in terms of monetary policy in 2024, investors will be closely monitoring these developments, as interest rates play a crucial role in shaping the broader economy and influencing stock market valuations. The Fed’s interest rate policy is also highly important to consumers, as potential cuts could translate into lower rates for mortgages and auto loans.

The decisions will also play into the strength (or weakness) of the U.S. dollar. The DXY dollar index, which measures the strength of the greenback against a basket of other major currencies, has so far declined 1.12% year-to-date as markets are slowly pulling out of high-yielding U.S. Treasury bonds and reducing USD demand.

Here's an overview of what Wall Street anticipates the Fed will do with interest rates in 2024. The overwhelming majority of banks are forecasting the Fed to start easing borrowing costs, although there is a large disparity between the speed and depth of the cuts.

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UBS: Fed will cut rates 11 times totaling 275 basis points

UBS predicts that the U.S. economy will experience a recession in 2024, prompting the Federal Reserve to take aggressive measures by significantly cutting interest rates next year.

In a note issued last month, the Swiss bank said it expects the Fed to slash interest rates by 275 basis points in the coming year. This projection translates to a remarkable 11 interest rate cuts from the Fed, assuming each cut is in increments of 25 basis points.

The cuts would be “a response to the forecasted US recession in Q2-Q3 2024 and the ongoing slowdown in both headline and core inflation,” UBS said. The bank anticipates that these interest rate cuts will begin during the Federal Reserve's FOMC meeting in March.

BofA Global Research sees four interest rate cuts totaling 100 bps

On Monday, December 18, BofA Global Research outlined its expectation that the U.S. Federal Reserve will implement four 25-basis point rate cuts in the upcoming year, beginning in March. The brokerage adjusted its anticipated total rate cuts for the year to 100 bps — up from the initial projection of 75 bps. The cuts are projected for March, June, September, and December.

The brokerage also revised the United States’ economic growth forecast on a quarterly average basis, elevating it by 0.6 percentage points to 1.2% for the coming year. This upward adjustment is attributed to a stronger outlook for consumer spending.

BofA's U.S. economist Michael Gapen said:

"Incoming data is signaling the U.S. economy can enjoy both modest growth and disinflation simultaneously”.

The Fed's recent dovish shift during the December policy meeting prompted an acceleration in the timeline for the central bank's first rate cut, as noted by Gapen.

Following Federal Reserve Chair Jerome Powell's indication of a likely conclusion to the historic tightening in monetary policy that began in March 2022, several Wall Street brokerages also adjusted their expectations regarding the timing of the first interest-rate cut.

Federal Reserve: Fed’s “dot plot” indicates three rate cuts totaling 75 basis points

The latest dot plot chart from the Federal Reserve revealed a median projection for the Federal Funds Rate to reach 4.6% by the end of 2024. This projection, released during the Fed's December FOMC meeting last Wednesday, suggests a shift toward a more dovish stance as inflation continues to moderate. In comparison, the Fed's previous dot plot projection in September had indicated no more than two 25-basis-point cuts in 2024.

If the Fed's updated projection proves accurate, it means that the market may have preemptively predicted up to five quarter-point cuts, potentially leading to market volatility. However, that didn’t happen on Wednesday, as stocks surged following the Fed's FOMC statement, with multiple indices, such as the Dow Jones Industrial Average, reaching record highs.

Goldman Sachs: Fed will cut rates by 50 basis points

Goldman Sachs believes that the combination of declining inflation and robust economic growth suggests that the Federal Reserve won't be in a hurry to cut rates next year.

The bank said it forecasts the Fed to cut rates by 50 basis points next year, with the first cut to take place in the third quarter of 2024.

"Healthy growth and labor market data suggest that insurance cuts are not imminent," Goldman Sachs' chief economist Jan Hatzius said in a recent note cited by Business Insider. "But the better inflation news does suggest that normalization cuts could come a bit earlier than our previous forecast of [the fourth quarter of 2024]."

Two interest rate cuts next year would put the Fed Funds rate in a range of between 4.75% and 5.00%.

At the time of writing, the U.S. dollar index traded at 102.41 (up 0.24% on the day, but down close to 1.1% year-to-date) while the yield on 10-year U.S. Treasury bonds fell to 3.886%, down from a high of close to 5% in mid-October.

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