(Bloomberg) — According to Morgan Stanley economists, if inflation remains low, the Federal Reserve is expected to implement deeper cuts in interest rates over the next two years, while analysts at Goldman Sachs Group Inc. anticipate shorter cuts with a later start.Thank you for reading this post, don't forget to subscribe!
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The team at Morgan Stanley, led by Chief U.S. Economist Ellen Zentner, mentioned in their 2024 outlook on Sunday that the central bank will initiate rate cuts in June 2024, followed by further cuts in September, with an increase of 25 basis points at each meeting from the last quarter onwards. They expect the policy rate to decrease to 2.375% by the end of 2025.
Meanwhile, Goldman Sachs forecasts the first 25-basis-point cut in the fourth quarter of 2024, followed by one cut per quarter through mid-2026 – totaling 175 basis points, maintaining rates at a range of 3.5%-3.75%. This information is based on economist David Mericle’s 2024 outlook published on Sunday.
The forecasts provided by Goldman Sachs align closely with those of the central bank. Fed projections from September indicate planned quarter-point cuts for the following year, with a projected policy rate of 3.9% in 2025, according to the average estimate of policymakers. Forecasts will be updated by Fed governors and regional bank presidents at next month’s meeting.
The team at Morgan Stanley predicts a weak economy that necessitates significant easing, without anticipating a recession. They foresee unemployment peaking at 4.3% in 2025, compared to the Fed’s projection of 4.1%. Growth and inflation are also expected to be slower than anticipated by officials.
Here are some 2025 forecasts from Morgan Stanley and Goldman Sachs compared to the average projections from Fed officials in September:
“Prolonged higher rates will result in persistent downward pressure, potentially restraining growth from 3Q24, despite the fiscal stimulus,” expressed Zentner’s group in their report. “We maintain our view that the Fed will achieve a soft landing, but weak growth will continue to elevate recession concerns.”
Morgan Stanley stated that the U.S. should avoid a recession as employers retain workers, even though the pace of hiring will be sluggish. This is expected to impact disposable income and expenditure.
The Morgan Stanley team also anticipates the central bank commencing the phasing out of quantitative tightening from next September until it concludes in early 2025. They foresee the Fed reducing the drawdown limit on Treasuries by $10 billion per month and continuing to reinvest mortgages into Treasuries.
Goldman Sachs anticipates the Fed maintaining relatively high rates due to the substantial balance sheet, asserting that “the post-financial crisis scenario is in the past,” and substantial budget deficits are likely to persist, maintaining strong demand.
“Our forecast can be seen as a middle ground between Fed officials, who perceive minimal rationale for maintaining high fund rates once the inflation issue is resolved, and those who perceive minimal rationale for stimulating the economy,” stated Goldman’s Mericle. “We conclude there is little reason to stimulate the economy,” he added.
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