Wall Street widely expects the Fed to start cutting rates next year, but the pace and timing of those cuts are subject of debate. Morgan Stanley (MS) predicts the Fed will cut rates starting in June 2024, with the Fed funds rate falling to 2.375% by the end of 2025. In contrast, Goldman Sachs forecasts a more cautious approach. The bank does not expect the Fed to cut rates until fourth quarter of 2024 with the terminal rate settling between 3.5% to 3.75%.
Yahoo Finance’s Seana Smith and Brad Smith analyze Wall Street’s forecasts for rate cuts, unemployment and inflation.
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Video Transcript
[AUDIO LOGO]– Our vibe on the street today, a tale of two Fed forecasts. Morgan Stanley economists are expecting deep cuts over the next two years with the Fed funds rate hitting just about 2.3% by the end of 2025. But it’s a different story from economists over at Goldman Sachs who are predicting the first rate cut in Q4 of 2024 followed by one every quarter through mid-2026 leaving rates between 4% in 4 and a quarter by the end of 2025.
So certainly, we’re seeing in terms of the projections predictions here from Morgan Stanley a much more aggressive path forward. They see at least for the Fed to cut when they do expect the Fed to start cutting here in June of 2024. So they essentially see cutting in June, again in September, and every meeting from the fourth quarter onwards in the 25 basis point increments.
They still though in that scenario think the US economy is going to be able to avoid a recession. They still think a soft landing is possible. But that fear of recession is going to be real and something that we are talking about when you couple that with the weakening growth or weaker growth that Morgan Stanley is expecting. Goldman Sachs saw a little bit more in line or similar to what we heard from the Fed and the Fed’s projections for rate cuts.
– And it just continues to put in eyesight how much work we still have to get or to do to get down to some of the Fed’s targets there. And where unemployment might tick up too because in the longer term goal, the longer run goal of getting inflation down to 2%, you could see the unemployment rate get up to 4% here. And one of the things that we’ve watched in this month over month move here is that we did see a tick higher in the unemployment rate. Even if we do see continued jobs being added here, it came in just a little bit below expectations. The markets reacted positively to that largely.
But at the end of the day, even as you’re looking across the different projections coming in from both Morgan Stanley and Goldman Sachs, it’s still is going up against the Fed Reserve Board members and Federal Reserve bank presidents who are anticipating that when we get into 2025, that’s when we’ll finally get down towards that 2% without actually getting to 2%.
So will the Fed be comfortable with a two handle on inflation rate? Excuse me. Will they be comfortable with that two handle in order to begin cutting at some point in 2024? Midpoint through 2024 is where some of those economists are predicting that we may see a cut come through.
– Yeah, certainly as we also take a look at some of the outlooks here from the equity side of things. Certainly, the tone, very optimistic here as we head in to the final weeks of the year. But you mentioned the fact that there’s so much uncertainty out there on the streets. Still lots of questions just about what exactly 2024 is going to look like obviously from a market perspective but also from an economic standpoint as well.
Source: finance.yahoo.com
