The United States is poised to experience a recession in 2024, necessitating substantial reductions in interest rates, as projected by UBS.
Anticipating a downturn in the US economy next year, UBS forecasts this will prompt the Federal Reserve to implement significant cuts in interest rates. This European banking giant, in its November analysis, predicted the Fed's reaction to decreasing inflation and a weakening economy would be to drastically reduce rates by 275 basis points. This figure is almost quadruple the 75-basis-point reduction currently expected by the market, as indicated by the CME Group's Fedwatch tool.
UBS's forecast, led by economist Arend Kapteyn and strategist Bhanu Baweja, emphasizes a pronounced cycle of Federal Reserve easing, beginning in March 2024. They predict a sharp drop in rates to about 1.25% by the first half of 2025.
These anticipated cuts from the Fed are in response to the projected US recession in the second and third quarters of 2024, alongside a continual decline in both headline and core inflation rates.
Since March 2022, the Federal Reserve has raised borrowing costs from near-zero to approximately 5.5% to combat rising inflation. Inflation peaked at a 40-year high of 9.1% in June of the previous year but has shown signs of cooling, although it remains significantly above the central bank's 2% goal.
This tightening campaign by the Fed is expected to impact the economy. However, the US has managed to stave off a recession thus far. The country's GDP grew by 4.9% in the third quarter, marking the highest growth rate in two years.
Additionally, the job market has remained relatively stable despite the Fed's interest rate hikes. The unemployment rate has slightly increased in recent months but continues to stay below 4%.
The recession forecast by Kapteyn and Baweja contrasts with another perspective from UBS's head of asset allocation for the Americas, Jason Draho. In a presentation, Draho highlighted the US economy's unexpected robustness this year, suggesting it sets the stage for a "roaring '20s" era characterized by heightened GDP growth, inflation, bond yields, and interest rates.
