- UBS predicts the Fed will cut interest rates significantly in 2024 as the US enters a recession, reducing rates by up to 275 basis points to 2.50-2.75%
- The Fed raised rates aggressively from near zero to 5.25-5.50% between March 2022-July 2023 to fight inflation, but UBS expects growth to slow to just 0.3% in 2024
- UBS believes the Fed will cut rates in 2024 to prevent policy becoming too tight as inflation falls rapidly and to counter economic weakening, driving a recovery in 2025-2026 after the recession
The Swiss bank UBS predicts that the US Federal Reserve will cut interest rates significantly in 2024 as the economy enters a recession. UBS economists expect the Fed to reduce rates by as much as 275 basis points next year, bringing the target range for the fed funds rate to between 2.50-2.75% by end-2024. This forecast is almost four times the consensus estimate.
The Fed’s Aggressive Tightening Cycle
Between March 2022 and July 2023, the Fed raised rates aggressively from near zero to a range of 5.25-5.50% in an effort to combat high inflation. This was the fastest pace of rate hikes since the 1980s. The central bank has since held rates steady, leading many to believe the tightening cycle has peaked. However, Fed Chair Jerome Powell said recently that rates may need to go higher to get inflation back down to the 2% target sustainably.
Economic Growth to Slow Substantially
UBS expects US economic growth to slow markedly in 2024. They forecast GDP growth of just 0.3% for next year, down from 2.9% in 2023. The bank sees rising unemployment, falling inflation, and declining consumer and business spending weighing on output. Fiscal stimulus will also fade. While risks failed to materialize in 2023, UBS believes the economy is more vulnerable next year as the impact of rate hikes is felt more fully.
Cuts to Prevent Restrictive Policy as Inflation Falls
UBS believes the Fed will cut rates next year for two reasons. First, to stop policy becoming overly tight as inflation falls rapidly. And second, to counteract the economic weakening. The bank sees the fed funds rate falling to 2.50-2.75% by end-2024 to stimulate growth again. UBS expects the cuts to drive a recovery in 2025 and 2026 after the 2024 recession.
Worst Credit Impulse Since Financial Crisis
UBS’s global head of economics says tightening financial conditions are a major concern. The credit impulse is now the worst since the global financial crisis as lending contracts sharply. Private payrolls and incomes are also flashing warning signs. While inflation is easing, debt servicing costs are rising faster than incomes giving scope for a pullback in spending.