US economic growth will remain resilient next year, making the Fed cautious about rate cuts, Barclays said.
The Fed is expected to begin a "significant" easing cycle in the second quarter of 2024.
The central bank will likely cut by 100 basis points in 2024 and another 100 points in 2025.
US economy will remain resilient next year, making the Federal Reserve cautious about rate cuts, Barclays said in a Monday note.
To be sure, consensus forecasts indicate economic growth will slow sharply, with real GDP expanding at an annualized pace of just 0.4% in first quarter and 0.3% in second quarter, down from an estimated average of 2.5% in 2023.
Payroll gains will also cool significantly, and inflation is expected to fall to within striking distance of the Fed's 2% target in 2024. Still, that means the US will avoid a recession, though the probability remains elevated.
"The Fed is forecast to begin a significant easing cycle in Q224 (markets are more aggressive relative to econ consensus), delivering 100bp cuts in 2024, another 100bp in 2025 and more in 2026 to a steady state rate of 2.75-3%," Barclays said, summing up the consensus view.
That implies the Fed will make four 25-basis-point rate cuts next year.
Meanwhile, analysts at ING have predicted the Fed will deliver six rate cuts next year as the economy slows, amounting to 150 basis points.
And UBS sees even more aggressive cuts, saying slow economic growth would drive the Fed to cut rates by 275 basis points by the end of 2024.
For its part, Barclays said markets are too pessimistic about the economy's continued resilience, which could fuel inflationary upside.
The PCE's trajectory towards 2.5% inflation will require everything to go favorably in the economy, it added, but further GDP upside could disappoint this.
Meanwhile, although excess savings have trended down, they're still high enough to prop up consumer spending.
The economy's continued resilience will also bring back pressure on US bond yields, with the 10-year Treasury set to average 4.5% by 2024's end. That's up from the current rate of just below 4.3%.
Treasurys will also be impacted by re-emerging risk factors, which were made clear during last quarter's bond market crash. These include an oversupply of Treasury assets, increased federal deficits, and loss of traditional market buyers.
The outcome of the US presidential election will play a role in where long-dated yields land, given how the elected leader approaches fiscal policy.
"Should it look like one party will end up controlling the White House and Congress, that would be seen as increasing the likelihood of fiscal expansion, either via higher spending or lower taxes," Barclays wrote. "A 1pp of GDP increase in budget deficits over the next 10 years would increase the fair value of 10y yields by 25-50bp."
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