Wall Street’s opinions on the Fed’s interest rate cut next year are very different.

Regarding the prospect of US interest rates, Wall Street investment banks unanimously agree that the Federal Reserve (Fed) will continue to raise interest rates next year, but opinions on how high the final interest rate will rise and whether it will cut interest rates next year are quite different.

It also underscores just how tricky the Fed’s job is, with Fed Chairman Jerome Powell standing at the crossroads of battling stubborn inflation and assessing whether recession and rising unemployment might turn into bigger worries.

The current consensus on Wall Street is that the Fed may raise interest rates by 2 yards (50 basis points) in December, raising the benchmark interest rate to 4.25-4.50%, and then raise the interest rate to regarding 5% before March next year. Here are the opinions of various investment banks:

• UBS: A total of 7 yards (175 basis points) of interest rate cuts next year
• Deutsche Bank: Cut interest rates by 4 yards (1 percentage point) later next year
• Nomura: The terminal rate is 5.75%, then it will drop back to 5%
• Barclays: 3 yards (75 basis points) of interest rate cuts between September and December next year
• Morgan Stanley: Terminal rate at 4.75%
• Bank of America (BofA): Cut interest rates by 4 yards in December next year
• Goldman Sachs and Wells Fargo: The terminal rate is 5.25%, and it will not cut interest rates next year
• JP Morgan: The terminal interest rate is 5%, and it will not cut interest rates next year if it maintains this level
• Citi: The terminal rate will appear in mid-2023, 5.25 to 5.5%, and it will remain at this level until the end of next year

Anna Wong, Bloomberg’s chief U.S. economist, said Powell made it clear on many occasions that the Fed learned an important lesson from the 1970s: Don’t cut rates too early even in a recession. She said that the most powerful condition for the Fed to cut interest rates next year will be that the inflation rate returns below 3%, but the economic model simulated by Bloomberg shows that there is a 68% chance that the inflation rate will be between 3-5% next year.

Fed Funds Futures Implied Rate Levels Source: Bloomberg

UBS, the Wall Street bank with the biggest rate cut forecasts, sees a “hard landing” for the U.S. economy, with unemployment soaring above 5% in 2024.

UBS said that history shows that the Fed often cuts interest rates quickly following unemployment occurs, with only four and a half months between the peak of the rate hike cycle (that is, the terminal interest rate) and the rate cut.

For example, Fed Chairman Paul Volcker in 1984 went from raising rates by more than 20 yards to cutting rates in just six weeks, and Fed Chairman Alan Greenspan in 1989 kept rates high for only three months. After the start of the week, a total of nearly 700 basis points of interest rate cuts were launched, while in 1995 it was waiting for 25 weeks to start cutting interest rates.

The extent of the slack in the labor market will affect the outlook for U.S. interest rates. According to Bank of America analysts, in the 16 interest rate hike cycles since 1954, the average unemployment rate when the Fed last raised interest rates was 5.7%. The U.S. unemployment rate was 3.7% in October.

The uncertainty of the economic outlook is too high, so that the market’s forecasts for the Fed’s policy outlook are quite different.
(Photo: AFP)

Deutsche Bank, which was the first to predict a recession, believes that the Fed may change course when the unemployment rate rises to 5.5% and inflation falls to just above 3%.

But more and more Fed watchers believe that the Fed will take a firm hawkish stance. Economists such as Goldman Sachs Jan Hatzius said this week that following the Fed raises interest rates to 5.25% next year, it will keep interest rates at that level until the end of next year.

Morgan Stanley argues that the U.S. economy will avoid a recession next year, and the Fed will wait until December next year to start cutting interest rates. “High inflation will keep the Fed on hold for a while.”

Analysts at Piper Sandler said this week that the Fed would have to see the following five phenomena before it might shift policy:

1. Inflation excluding food and energy set to head towards 2%
2. Falling price expectations
3. financial conditions tighten
4. The labor market has weakened sharply
5. Reserve more time to wait for policy fermentation

Piper Sandler analysts Robert Perli and Benson Durham said the Fed’s cycle of rate hikes, which began in March this year, is only eight months old.The most likely scenario is that the Fed won’t have a clear grasp until March of next year on whether rate hikes during this period will be enough to curb inflation。

(This article is not open to partners to reprint)

---