UBS Predicts Fed to Transition into “Full-On Accommodation” Mode in 2024, Anticipating Nearly 3% Rate Cuts Amid Economic Slowdown

The Federal Reserve is expected to make aggressive interest rate cuts in 2024, surprising the markets, according to UBS. UBS predicts that slow economic growth will drive the Fed to cut rates by 275 basis points by the end of 2024. The firm anticipates a significant slowdown in economic growth next year, resulting in reduced retail spending, a worsening consumer balance sheet, and an increase in the unemployment rate. UBS expects GDP to grow just 0.3% in 2024, compared to the 3% gain over the past four quarters. The unemployment rate is also projected to rise to 5.0% by the end of next year. UBS believes that the Fed will start lowering rates in March, with a more significant reduction in the second half of the year. The firm predicts that the Fed will cut rates by 275 basis points, leaving the effective federal funds rate at 2.50%-2.75%. This estimate is well above market expectations, which anticipate only 75 basis points of cuts in 2024. UBS attributes its sharp estimate to the expectation that disinflation will persist throughout the year, giving the Fed confidence that inflation has been contained despite slowing economic growth. UBS also suggests that the lack of fiscal policy support from Washington, DC, will drive the Fed to proceed with the interest rate cuts.