- Barclays said U.S. economic growth will remain resilient next year, making it wary of interest rate cuts.
- The central bank is expected to begin a „significant” easing cycle in the second quarter of 2024.
- The central bank will cut rates by 100 basis points in 2024 and another 100 points in 2025.
Barclays said in a note on Monday that the US economy will remain resilient next year, with the Federal Reserve cautious about rate cuts.
Of course, consensus forecasts indicate that economic growth will slow sharply, with real GDP expanding at an annual pace of just 0.4% in the first quarter and 0.3% in the second quarter, down from an estimated average of 2.5% in 2023.
Wage gains will also cool significantly, and inflation is expected to fall significantly short of the central bank’s 2% target in 2024. However, the probability is high that the US will avoid recession.
„The Fed is forecast to begin a significant easing cycle in Q224 (markets are more aggressive relative to economic consensus), delivering 100bp cuts in 2024, another 100bp in 2025 and a steady rate of 2.75-3% in 2026.” Barclays summarized the consensus view.
That means the Fed will make four 25-basis-point rate cuts next year.
Meanwhile, analysts at ING predict the central bank will deliver six rate cuts next year as the economy shrinks by 150 basis points.
UBS sees more drastic cuts, with slower economic growth pushing the central bank to cut rates by 275 basis points by the end of 2024.
For its part, Barclays said markets were too pessimistic about the economy’s continued slowdown, which could push up inflation.
PCE’s path towards 2.5% inflation should mean everything is going well for the economy, but further GDP headwinds could frustrate this.
Meanwhile, although excess savings have declined, they remain high enough to push up consumer spending.
A continued slowdown in the economy will put pressure back on U.S. bond yields, with the 10-year Treasury yield averaging 4.5% at the end of 2024. This is lower than the current rate of 4.3%.
Treasuries will be affected by re-emerging risk factors, which were clarified in the last quarter Stock market crash. These include an oversupply of Treasury assets, federal deficits, and the loss of traditional market buyers.
The outcome of the US presidential election will play a role in the long-term yield of the land, depending on how the president-elect approaches fiscal policy.
„When one party appears to control the White House and Congress, it increases the likelihood of fiscal expansion through higher spending or lower taxes,” Barclays wrote. „A 1pp GDP increase in the budget deficit over the next 10 years would increase the fair value of 10y yields by 25-50bp.”
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