As the economic landscape continues to evolve, Wall Street banks are divided on their predictions for the Federal Reserve's interest rate policy in 2024. UBS Group AG and Morgan Stanley anticipate more aggressive rate cuts, citing concerns about falling inflation and a lagging economy, while Goldman Sachs takes a more moderate stance.
UBS Investment Bank's chief strategist, Bhanu Baweja, remains skeptical, stating, "We don't see the conditions for why this time is so different." UBS expects interest rate reductions to commence in March if the US economy heads into a recession in the second quarter. The bank foresees rates dropping to 2.5%–2.75% by the end of 2024, with a terminal rate of 1.25% by early 2025.
Ellen Zentner, the chief US economist at Morgan Stanley, anticipates even deeper cuts, forecasting 25-basis-point drops in June, September, and every meeting after the fourth quarter. This would bring the policy rate to 2.375% by 2025. Unlike UBS, Morgan Stanley anticipates a weaker economy, projecting a 4.3% unemployment peak in 2025 compared to the Fed's 4.1%.
On the other hand, Goldman Sachs takes a more measured approach, predicting a 25-basis-point cut in the fourth quarter of 2024, then one per quarter through mid-2026, resulting in rates between 3.5% and 3.75%. This aligns closely with market expectations and the central bank's outlook. Goldman Sachs attributes the potential maintenance of high rates to a higher equilibrium rate and the positive impact of larger budget deficits on demand.
Comparing these forecasts to the September median of Fed officials' projections reveals significant disparities. UBS and Morgan Stanley expect nearly four times more easing than market estimates, which project a three-quarters of a point rate reduction by 2024. Goldman Sachs' forecasts are more in line with both market bets and the central bank's outlook.
Morgan Stanley's team emphasizes the potential drag of persistently high rates on economic growth, anticipating a soft landing for the Fed. They project the central bank to phase out quantitative tightening in September 2024 and stop in early 2025. The Fed would decrease Treasury unoff caps by $10 billion per month and reinvest mortgages.
In contrast, Goldman Sachs argues that the Fed is likely to maintain higher rates due to a higher equilibrium rate, with post-financial crisis headwinds behind us and larger budget deficits boosting demand.
As we await updated forecasts from Fed governors and regional bank presidents next month, these differing perspectives highlight the complexity and uncertainty surrounding the future path of interest rates and their potential impact on the broader economy.
