The possibility of the Federal Reserve beginning to cut interest rates in 2024 has been met with cheers from the markets, but Wall Street experts are cautioning that the move could signal broader economic slowings.
As inflation continues to fall and the Fed refrains from further increasing its benchmark rate, investors have raised their expectations for a central bank interest rate cut next year. The CME FedWatch tool indicates that the markets are pricing in a 95% chance of rates being lower than the current level by next December, with the cheer sparked by Tuesday’s lower-than-expected inflation report, which showed prices rising 3.2% in October, just below the expected 3.3%.
Former PIMCO chief economist Paul McCulley stated that the Fed is now comfortable declaring that policy is sufficiently restrictive, meaning they have finished tightening, and the next move will be an ease, in an interview this week.
However, experts warn that investors hoping for a bullish rally in stocks if the Fed cuts rates may not get the outcome they are looking for, as rate cuts would likely be in response to a slowing economy. JPMorgan’s chief market strategist has estimated that stocks could drop as much as 20% in the event of a recession.
According to Deutsche Bank strategists, the Fed has cut interest rates before a recession in five of the last 10 downturns, indicating that rate cuts are not a guarantee to prevent a downturn and can be a sign that problems are on the horizon.
UBS strategists have also warned that rates could be slashed by as much as 275 basis points as the economy tips into a recession sometime in the middle of next year, much more than the market is currently expecting. Signs of a slowdown have also emerged in various sectors of the economy, with real GDP growth expected to slow and retail spending seeing a decline.
The pullback in spending is influenced by a cooling labor market, with the economy adding fewer jobs in October and the unemployment rate ticking higher, a potentially worrying indicator for an upcoming recession.
Given these cautious indicators, any future rate cuts from the Fed could be a prelude to a slowdown in the economy and a tough period for investors.
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