Soft landing still in play as Fed rate cuts will go 'well beyond' expectations: MS
Investing.com -- The Federal Reserve's higher for longer rate regime will be followed up by a series of rate cuts starting in June next year that will go «well beyond» market expectations, Morgan Stanley says, expecting the Fed to achieve a soft landing as it embarks on the last mile to curbing inflation to target.
The Fed is expected to deliver four 25 basis point cuts next year, lowering rates from 5.375% to 4.375% in 2024, Morgan Stanley forecasts, followed by eight cuts in 2025, pushing its benchmark rate to 2.375% by the end of 2025.
That is above current market expectations for the Fed funds rate to end next year in a range of 4.50% to 4.75%, or 4.625% at the midpoint, suggesting three rate cuts for next year. And well above the Fed's own projections for two rate cuts in 2024.
Others, however, have opted for a bolder forecast, with UBS expecting 275 basis points of cuts next year, while Goldman Sachs maintained a more cautious outlook calling for a single rate cut starting in Q4 next year.
Expectations for deeper rate cuts than expected will likely be driven by the slowdown in economy economic growth, brought on by the Fed's higher for longer interest rate regime.
But this slowdown, Morgan Stanley forecasts, will be kept in check by a labor market that will underpin consumer spending as companies hoard workers and more people join the workforce.
«We see job growth slowing into 2024 and 2025, but labor hoarding will help keep the unemployment rate low, underpinning our call for a soft landing,» Morgan Stanley said, forecasting GDP to slow from an estimated 2.5% in 2023 to 1.6% in 2024, and 1.4% in 2025.
As the Fed stares down the last mile on inflation, the central bank can count on two main forces to
Read more on investing.com
