- The Federal Reserve will slash rates more aggressively than expected, Pantheon Macroeconomics forecasts.
- That's due to a steadily weakening US economy, with unemployment likely to tread higher next year.
Federal Reserve 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, Pantheon Macroeconomics has said.
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 would be coming next year.
But Pantheon's chief economist, Ian Shepherdson, predicted that rate cuts would most likely be even steeper than expected, as the economy would be even weaker than forecast.
Central bankers have raised rates by 525 basis points since early 2022. But their impact probably hasn't been fully felt in the economy, economists say, as it can take about 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 at about 5.5% in early 2025, up from 3.7% now. Inflation and GDP are also likely to be lower than what the Fed forecast.
"Rates will have been cut much more than the 75bp the FOMC expects next year," he said. "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 said 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 about 275 basis points of rate cuts.