UBS anticipate a decrease in growth, more unemployment, and a diminution in inflation will motivate the Federal Reserve to lower its benchmark rate by the end of the year to a target range of between 2.50% and 2.75%. Arend Kapteyn, UBS Global Head of Economics and Strategy Research, stated in an interview with CNBC on Tuesday that backdrop now is "significantly poorer than it was 12 months ago", particularly due to the "unprecedented" amount of credit being eliminated from the American economy.
UBS forecast that the Federal Reserve could cut interest rates by as much as 275 basis points by 2024, nearly four times the market consensus, as the U.S. economy slips into a recession. In its 2024-2026 outlook for the U.S. economy, the Swiss bank stated that many of the same impediments and dangers remain despite economic stability in 2023 and that fewer of the factors upholding growth that enabled the year 2023 will be present in 2024. UBS predicted that disinflation and elevated joblessness would bring down economic output in 2024, pushing the FOMC to reduce rates "initially to avert the nominal funds rate from turning out to be increasingly constrictive as inflation decreases, and later in the year to impede the economic deterioration." After eleven rate increases between March 2022 and July 2023, the FOMC ceased at the 5.25-5.5% target range, leading markets to generally conclude that rates have peaked and to begin guessing on the magnitude and timing of forthcoming cuts. Nevertheless, Fed Chair Jerome Powell said last week that he was not assured the FOMC had done enough to make inflation predictably reach its 2% target.
UBS noted that, though interest rates had risen and stock markets suffered pressure following the September FOMC meeting, real GDP had still advanced 2.9% in the year to the third quarter. The bank believes this renewed worries about growth, signifying the economy had "not yet emerged from difficult straits." They highlighted the impact of higher interest rates, tighter lending standards, and downward revisions of labor market income, all of which have weighed on expansion. UBS estimates consumer spending, bolstered by fiscal stimulus and boosted by excess savings, is at present elevated relative to income. However, they anticipate such upward pressure on growth to diminish in the next year, due to decrease in savings and weakening of balance sheets. Furthermore, if the economy does not slow markedly, they doubt the FOMC can restore price stability. While 2023 outperformed expectations, UBS opined that this does not mean the risks have vanished.
We believe that private sector industries are likely to be impacted by the Federal Open Market Committee's (FOMC) rate hikes in the coming year. Looking ahead, UBS anticipates a decrease in GDP growth to 0.3% in 2024, an increase in the unemployment rate to nearly 5% and a reduction in the federal funds rate in the range of 2.50%-2.75%. This disinflationary outlook will likely lead to a need for monetary policy easing, with GDP growth projected to return to approximately 2-1/2% by mid-2025 and the peak in unemployment rate estimated to reach 5.2% in early 2025. UBS Global Head of Economics and Strategy, Arend Kapteyn, commented to CNBC on Tuesday that current conditions are much more severe than they were this time last year due to the unprecedented amount of credit withdrawal from the U.S. economy. The credit impulse is now the worst it has been since the Global Financial Crisis. Further, it is reported that margins are being compressed in the U.S., which could foreshadow layoffs.
As private payrolls ex-health care exist close to zero and some of the 2023 fiscal stimulus rolls off, UBS Chief Economist Kapteyn highlighted the "massive gap" between real incomes and spending, which could lead to negative quarters mid-next year since household debt is climbing faster than real income growth. A recession is recognized in numerous economies by two consecutive quarters of GDP reduction. Meanwhile, the NBER Business Cycle Dating Committee describes it as a substantial recession in economic activity that is spread throughout the economy and that persists for more than a few months. Goldman Sachs believes the U.S. economy will increase by 2.1% in 2024, surpassing other advanced markets. The company's Head of Global FX, Rates and EM Strategy, Kamakshya Trivedi, informed CNBC on Monday that the Wall Street firm was "pretty confident" in the U.S. growth outlook due to steady real income growth, the likely bottoming out of the global industrial cycle, and more accommodative monetary policy with increasing inflation. Trivedi also expressed the belief that the Fed could remain at its plateau given the combination of these elements.
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