• According to UBS, the Federal Reserve will shock markets with aggressive interest rate cuts next year.
  • UBS said slow economic growth will prompt the Fed to cut interest rates by 275 basis points by the end of 2024.
  • “We expect significantly slower growth, rising unemployment and significant reductions in the federal funds rate in 2024,” UBS said.

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The Federal Reserve will shock investors with aggressive interest rate cuts next year amid a slowing economy, according to UBS’s 2024 economic outlook.

The company said it expects economic growth to slow significantly next year after growing strongly this year. This is likely to lead to lower retail spending, a deterioration in consumer balance sheets and a further increase in the unemployment rate.

“We expect economic growth to slow sharply over the next few quarters, with a slight decline of half a percentage point at mid-year,” UBS said in a statement on Monday.

For the full year, the company expects GDP to grow just 0.3% in 2024, a significant slowdown from the 3% growth in the last four quarters.

Meanwhile, UBS expects the unemployment rate to rise by more than a full percentage point to 5.0% at the end of next year. Starting in March, the Fed will begin cutting interest rates slightly.

“However, as the economic slowdown and additional disinflationary phase begin in earnest, we expect the Fed to move to broad easing with further rate cuts in the second half of the year, consistent with what it has done in the past. “.”

UBS said it expects the Fed to cut interest rates by 275 basis points, leaving the effective rate at 2.50% to 2.75%. The Fed currently has interest rates set at 5.25% to 5.50%.

That’s well above market expectations, according to data from the CME Fed Watch Tool, which expects cuts of just 75 basis points in 2024, pushing the key interest rate to between 4.50% and 4.75%.

UBS’s tough call for a rate cut comes on expectations that disinflation will continue throughout 2024, giving the Fed confidence that inflation has been tamed amid slowing economic growth.

UBS expects the Fed to begin cutting interest rates in earnest in 2024 and said the lack of fiscal support from Washington, DC will prompt the Fed to press ahead with rate cuts.

“The historically high budget deficit, the upcoming presidential elections and a fragmented political landscape mean we have little scope for economic fiscal support,” said UBS.

Source : www.businessinsider.com

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