(Kitco News) - The Federal Reserve’s unprecedented tightening cycle has ended, but some market analysts note that markets still face a potential reckoning as expectations remain well above what the central bank has signaled.
At its last monetary policy meeting of 2023, the Federal Reserve, in its updated economic projections, signaled the potential for three rate cuts next year. Meanwhile, according to the CME FedWatch Tool, markets are pricing in nearly 200 basis points of easing in 2024,and they expect the central bank to start easing as early as March.
Ahead of the new year, many analysts and banks are leaning closer to market expectations than the Federal Reserve’s own projections; however, most still see March as too soon for the start of a new easing cycle.
“If the Federal Reserve were to cut rates in March, it would signal that the U.S. economy is headed towards a recession and that is not the message they want to send,” said Colin Cieszynski, portfolio manager and chief market strategist at SIA Wealth Management.
Although economists and market analysts expect to see aggressive easing from the Fed next year, they said that it will result from slowing economic growth, which is at odds with market expectations.
Markets expect the Fed to cut rates significantly next year, but they also see relatively stable economic activity. Market analysts at Wells Fargo noted this contrasting viewpoint in their 2024 outlook.
“Either this soft landing is going to re-accelerate, and we're going to be dealing with inflation again, or this soft landing is only for a moment in time, and the economic slowdown broadens and deepens, and we find ourselves in a much harder landing, which would be really bad,” said senior global market strategist Sameer Samana in the bank’s presentation.
Wells Fargo is looking for the Federal Reserve to cut interest rates only two times next year. However, analysts do see downside risks to the economic outlook.
On the other end of the spectrum, fixed-income analysts at TD Securities expect the Federal Reserve to ease rates by 250 basis points next year as growth slows. They also see the first rate cut in May.
“As the economy slows and the Fed cuts rates by 250bp starting in mid-2024, 10y yields should decline to 3.15%,” the analysts said in their 2024 outlook.
Fixed-income analysts at Commerzbank said they expect the Federal Reserve to cut interest rates by 200 basis points next year, and they predict the first cut will come in May.
“We expect stronger rate cuts than the Fed, as we have a less favorable growth picture, with a slight recession in spring/summer 2024,” the analysts said.
However, not all analysts expect weaker growth to precipitate lower interest rates.
In an interview with Kitco News, Kristina Hooper, chief investment strategist at Invesco, said that the aggressive rate hikes in 2023 give the central bank room to ease without spooking markets.
She noted that six 25-basis-point cuts would equal just two of the Federal Reserve’s 75 basis-point hikes from last year.
“We expect easing to emerge late in the first half of 2024 as inflation continues to move towards acceptable rates and growth slows,” Hooper said in her 2024 outlook. “Easing should help a recovery to take shape, returning the global economy toward trend growth in the second half of 2024.”
