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UBS predicts series of Fed rate cuts next year due to US recession


U.S. Federal Reserve Chairman Jerome Powell answers questions from reporters during a news conference after the release of the Fed’s policy decision to leave interest rates unchanged, at the Federal Reserve in Washington, US United States, September 20, 2023.

Evelyn Hockstein | Reuters

UBS expects the U.S. 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 deeper into recession .

In its Outlook for the U.S. Economy 2024-2026, released Monday, the Swiss bank said that despite economic resilience through 2023, many of the same obstacles and risks remain. At the same time, the bank’s economists suggest that “the supports for growth which made it possible to overcome these obstacles in 2023 will be fewer in 2024”.

UBS expects disinflation and rising unemployment to weaken economic output in 2024, leading the Federal Open Market Committee to cut rates “first to prevent the nominal funds rate from becoming increasingly restrictive as inflation falls, and later in the year to stem economic weakening.”

Between March 2022 and July 2023, the FOMC adopted a series of 11 rate hikes to raise the federal funds rate from a target range of 0%-0.25% to 5.25%-5.5%.

The central bank has since held steady at that level, prompting markets to conclude that rates have peaked and to begin speculating on the timing and magnitude of future cuts.

However, Fed Chairman Jerome Powell said last week that he was “not convinced” that the FOMC has yet done enough to bring inflation sustainably back to its 2% target.

UBS noted that despite the most aggressive rate hike cycle since the 1980s, real GDP grew 2.9% over the year through the end of the third quarter. However, yields have been rising and stock markets have been under pressure since the September FOMC meeting. The bank says this has reignited growth concerns and shows the economy is “not yet out of the woods”.

“The expansion bears the growing weight of rising interest rates. Credit and lending standards appear to be tightening beyond simple revaluation. Labor market incomes continue to be revised downward , net, over time,” underlined UBS.

“According to our estimates, economic spending appears high relative to income, pushed up by fiscal stimulus and kept there by excess savings.”

The bank estimates that upward pressure on growth from the 2023 fiscal stimulus will fade next year, while household savings “dwindle” and balance sheets appear less strong.

“Furthermore, if the economy does not slow significantly, we doubt the FOMC will restore price stability. 2023 outperformed because many of these risks did not materialize. However, this does not mean that they have been eliminated,” UBS said.

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“In our view, the private sector appears less insulated from FOMC rate hikes next year. Looking ahead, we expect significantly slower growth in 2024, a rise in the unemployment rate and to significant reductions in the federal funds rate, with the target range ending the year between 2.50% and 2.75%.

UBS expects the economy to contract by half a percentage point by the middle of next year, with annual GDP growth falling to just 0.3% in 2024 and unemployment rising to almost 5 % by the end of the year.

“With this additional disinflationary boost, we expect that monetary policy easing next year will spur the recovery in 2025, pushing GDP growth to around 2 1/2%, limiting the unemployment rate peak to 5, 2% in early 2025. We expect some will slow in 2026, partly due to planned fiscal consolidation,” the bank’s economists said.

The worst credit surge since the financial crisis

Arend Kapteyn, global head of economic and strategy research at UBS, told CNBC on Tuesday that the starting conditions are “much worse now than 12 months ago”, particularly in the form of the “historically large” amount. credit that is withdrawn from the market. The American economy.

“The credit impulse is now at its worst level since the global financial crisis – we think we see that in the data. There is margin compression in the US, which is a good precursor to layoffs, so “U.S. margins are lower. pressure on the economy as a whole than in Europe, for example, which is surprising,” he told CNBC’s Joumanna Bercetche on the sidelines of the UBS European conference .

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Meanwhile, private sector payrolls excluding health care are growing near zero and part of the 2023 fiscal stimulus is winding down, Kapteyn noted, also reiterating the “massive gap” between actual income and spending which means there is “a lot more scope for this”. spending will fall toward these income levels.

“People then ask ‘why aren’t income levels rising, because inflation is falling, when real disposable incomes should be improving?’ But in the United States, household debt service is now growing faster than real income growth, so we think there is enough room to see a few negative quarters in the middle of next year. explained Kapteyn.

A recession is characterized in many economies by two consecutive quarters of contraction in real GDP. In the United States, the National Bureau of Economic Research’s Business Cycle Dating Committee defines a recession as “a significant decline in economic activity that spreads throughout the economy and lasts more than a few months.” . This takes into account an overall assessment of the labor market, consumer and business spending, industrial production and income.

Goldman “rather confident” in US growth prospects

UBS’s outlook for rates and growth is well below market consensus. Goldman Sachs forecasts that the U.S. economy will grow 2.1% in 2024, outpacing other developed markets.

Kamakshya Trivedi, head of global FX, rates and emerging markets strategy at Goldman Sachs, told CNBC on Monday that the Wall Street giant was “pretty confident” in the outlook for U.S. growth.

“Real income growth looks quite firm and we think this will continue to be the case. The global industrial cycle, which we thought was going through a fairly soft patch this year, is showing signs of bottoming out, including in some parts of the country. So in Asia, we’re pretty confident about that,” he told CNBC’s “Squawk Box Europe.”

Trivedi added that as inflation gradually returns to target, monetary policy could become a little more accommodative, pointing to some recent dovish comments from Fed officials.

“I think this combination of factors – the easing of policy drags, the strengthening industrial cycle and the growth in real incomes – makes us quite confident in the Fed’s ability to maintain this plateau,” he said. concluded.

Correction: Between March 2022 and July 2023, the FOMC adopted a series of 11 rate hikes to raise the federal funds rate from a target range of 0%-0.25% to 5.25%-5.5 %. An earlier version incorrectly indicated the beach.



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