• The US economy could slip into a surprise recession in 2024, Morgan Stanley said.
• It said the Fed and the Treasury merely delayed a recession this year by propping up economic growth.
• The Fed could slash interest rates next year as a downturn strikes, the bank said.

The US economy could be in for a surprise recession in 2024 that would put pressure on the Federal Reserve to drag interest rates lower, Morgan Stanley strategists said.

The bank listed its “Top 10 Surprises for 2024” in a note earlier this month. Among the predictions was that a hard landing “arrives in style.”

“The biggest surprise of 2024 may be that the elusive hard landing finally arrives after all — just after most investors concluded that ‘this time was different indeed,'” the bank said. “It took most of the year for the consensus to fully embrace the soft landing narrative — a consistent feature of our base case since 2022. But it won’t take that long for investors to kick themselves for having been fooled again.”

The strategists said the Fed’s rate hikes and the US Treasury’s debt issuance effectively added economic stimulus in 2023 via more interest payments. But that could switch to a drag on growth next year.

They said that’s because monetary policy would get more restrictive in real terms in 2024, given that benchmark rates tend to come down more slowly than inflation.

“The surprise for 2024 comes in how the combination of increasing policy restraint around the world, the loss of US federal government fiscal policy support, and the heightened uncertainty related to the US general election push the economy into a hard landing,” the note said.

Some signs of weakness have emerged as interest rates remain elevated. The labor market has steadily weakened for most of the year. Meanwhile, consumer spending looks to be slowing down, which could push the economy into the long-awaited downturn.

Morgan Stanley predicted that that would be likely to push the Fed to rapidly cut interest rates in 2024. Strategists forecast two 25-basis-point rate cuts in March and May, followed by a series of 50-basis-point rate cuts through the rest of the year.

Those cuts could take the Fed’s rate target as low as 2.25% to 2.5% in 2024, and it could hit 1.5% to 1.75% in 2025, where it was at the start of the pandemic — “metaphorically bringing to an end an unforgettable chapter in our lives,” the strategists said.