U.S. Federal Reserve Chairman Jerome Powell answers questions from reporters during a news conference following the release of the Fed’s decision to keep interest rates unchanged, at the Federal Reserve in Washington, United States, September 20, 2023.
Evelyn Hockstein | Reuters
UBS expects the 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 slides into recession.
In its 2024-2026 U.S. economic outlook released Monday, the Swiss bank said that despite economic resilience, many of the same headwinds and risks remain through 2023. Meanwhile, the bank’s economists suggested that “there will be fewer growth supports in 2024, allowing these obstacles to be overcome in 2023.”
UBS expects disinflation and rising unemployment to weaken economic output in 2024, prompting the Federal Open Market Committee to cut interest rates, “initially to prevent the nominal interest rate from becoming increasingly restrictive as inflation falls.” and later in the year to stem the economic slowdown.”
Between March 2022 and July 2023, the FOMC decided on a series of 11 rate hikes to raise the Fed funds rate from the target range of 0.25-0.5% to 5.25-5.5%.
Since then, the central bank has paused at that level, leading markets largely to conclude that interest rates had peaked and to begin speculating about the timing and size of future rate cuts.
However, Fed Chairman Jerome Powell said last week that he was “not confident” that the FOMC had already done enough to sustainably bring inflation back to its 2% target.
UBS noted that despite the most aggressive rate-hiking cycle since the 1980s, real GDP grew 2.9% over the year through the end of the third quarter. However, yields have risen and equity markets have come under pressure since the September FOMC meeting. The bank expects this to spark renewed growth concerns and show the economy is “not out of the woods yet”.
“The expansion bears the increasing weight of higher interest rates. Lending and lending standards appear to be tightening beyond simple reassessment. Labor market income will continue to be adjusted downwards over time,” emphasized UBS.
“According to our estimates, spending in the economy appears to be elevated relative to income, boosted by fiscal stimulus, and maintained at that level by excess savings.”
The bank estimates that upward pressure on growth from fiscal stimulus in 2023 will ease next year, while household savings will “thin out” and balance sheets appear less robust.
“Furthermore, we doubt that the FOMC will restore price stability unless the economy slows significantly. The year 2023 developed above average because many of these risks did not materialize. However, that does not mean they have been eliminated,” UBS said.
“In our view, the private sector appears to be less insulated from next year’s FOMC rate hikes. Looking forward, we expect significantly slower growth in 2024, rising unemployment and significant reductions in the federal funds rate, with a target range of between 2.50% and 2.75% by the end of 2024.”
UBS expects the economy to shrink by half a percentage point by the middle of next year, annual GDP growth to fall to just 0.3% in 2024 and unemployment to rise to almost 5% by year’s end.
“With this additional disinflationary stimulus, we expect monetary policy easing next year to drive the recovery in 2025 and boost GDP growth back to around 2 1/2%, bringing the unemployment rate peak to 5 in early 2025 .2% is limited. We forecast.” “There will be some slowdown in 2026, partly due to forecast fiscal consolidation,” the bank’s economists said.
Worst credit stimulus since the financial crisis
Arend Kapteyn, global head of economics and strategy research at UBS, told CNBC on Tuesday that the initial conditions are “much worse now than they were 12 months ago,” particularly in the form of the “historically high” amount of loans being withdrawn from the US -Business.
“Credit stimulus is now at its worst level since the global financial crisis – we think we can see that in the data. In the US there is a decline in margins, which is a good harbinger of layoffs, so US margins are below more.” “The pressure on the economy as a whole is greater than, for example, in Europe, which is surprising,” he told Joumanna Bercetche of CNBC on the sidelines of the UBS European Conference.
Meanwhile, non-healthcare private payrolls are rising to near zero and some of the fiscal stimulus for 2023 is fading, Kapteyn noted, also reiterating the “massive gap” between real income and spending that means there is “a lot more room for that.” Expenses will decline toward that income level.”
“The counterpoint that people then have is that they say, ‘Why aren’t income levels rising when inflation falls, should real disposable incomes improve?’ But in the US, household debt service is now rising faster than real income growth, so we fundamentally expect there to be enough there to see a few negative quarters in the middle of next year,” Kapteyn argued.
In many economies, a recession is characterized by real GDP contracting in two consecutive quarters. In the US, the Business Cycle Dating Committee of the National Bureau of Economic Research (NBER) defines a recession as “a significant decline in economic activity that extends throughout the economy and lasts for more than a few months.” A holistic view of the labor market, consumer and corporate spending, industrial production and income is taken into account.
Goldman is “fairly confident” about the U.S. growth outlook.
UBS’s outlook for both interest rates and growth is well below market consensus. Goldman Sachs forecasts the U.S. economy will grow 2.1% in 2024, outperforming 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 is “quite confident” about the U.S. growth outlook.
“Real income growth appears to be fairly stable and we expect this to continue to be the case. The global industrial cycle, which has been through a fairly weak period this year, is, in our opinion, showing some signs of having bottomed out, including in parts of “We’re pretty confident about that,” he told Squawk Box Europe CNBC.
Trivedi added that monetary policy may become a little more accommodative as inflation gradually returns to target, citing some recent dovish comments from Fed officials.
“I think the combination of these factors – the easing policy burden, the stronger industrial cycle and real income growth – makes us fairly confident that the Fed can remain at this plateau,” he concluded.
Source : www.cnbc.com