Fed rate cuts will be even more aggressive than expected in 2024 as unemployment surges past 5%, economist says
- The Fed will slash rates even more aggressively than expected, Pantheon Macro forecasted.
- That’s due to a steadily weakening US economy, with unemployment likely to tread higher next year.
- Rate cuts will exceed 75 basis points as the jobless rate surpasses 5%, the firm said.
Fed rate cuts will be even steeper than central bankers are expecting in 2024, thanks to a steadily weakening economy and the unemployment rate climbing higher, according to Pantheon Macroeconomics.
The research firm pointed to the Fed’s interest rate forecast at their latest policy meeting, with central bankers suggesting three 25-basis-point cuts are coming next year.
But rate cuts will likely be even steeper than expected, Pantheon’s chief economist Ian Shepherdson predicted, as the economy will be even weaker than is forecasted.
Central bankers have raised rates 525 basis points since early 2022. But their impact likely haven’t been fully felt in the economy, experts say, as it can take around 18 months for rate hikes to have their effect.
That suggests the economy will continue to slow, despite its resilience to higher interest rates so far. Shepherdson estimated that the jobless rate would peak around 5.5% in early 2025, up from 3.7% now. Inflation and GDP are also likely to be lower than what the Fed forecasted.
“And rates will have been cut much more than the 75bp the FOMC expects next year,” he added. “In short we expect a rather different GDP, unemployment, inflation, and rates profile than the Fed. The economy probably will be weaker than policymakers expect in 2024 and the first half of 2025, driving inflation down rapidly. Later, we hope aggressive easing will trigger a rebound in activity, but inflation will stay low through the entire forecast period.”
Markets, for what it’s worth, are already anticipating steeper interest rate cuts next year than what the Fed has suggested. Investors are pricing in a 64% chance rates could be below 4% by the end of next year, according to the CME FedWatch tool, implying more than a full percentage point of rate cuts.
But more aggressive monetary easing could easily be a double-edged sword for markets, some Wall Street strategists have warned.
Steep rate cuts are often a sign that “problems are coming” in the economy, Deutsche Bank strategists warned in a recent note. UBS, meanwhile, is predicting the economy will tip into a full-blown recession sometime in mid-2024, which could usher in around 275-basis-points of rate cuts.
