Economists at Deutsche Bank foresee 175 basis points in rate cuts in 2024.
According to economists at Deutsche Bank, the Fed (Federal Reserve) is likely to cut rates quite aggressively in the first half of 2024. The new report suggests a possible 175 basis points in rate cuts next year.
Economists at the German multinational investment bank believe that the rate cuts in the first half of 2024 will be a lot more aggressive than markets are currently pricing. With the projected cut at 175 basis points, according to a report from the bank, the interest rate would likely shift from the current 5.25%-5.5% range, to 3.5%-3.75%. According to LSEG data, traders were pricing in that rates would be at 4.48%
In addition to rate cuts, Deutsche Bank also believes that unemployment will rise next year. In a conversation with Reuters, the company’s senior US economics Brett Ryan predicted a “pretty sharp rise” in the US unemployment rate. Ryan believes it would rise from the current 3.9% to 4.6% by mid-2024. According to the economist, the problem would stem from Q1 and Q2 reflecting negative economic growth. Nonetheless, Ryan believes rate cuts will begin mid-year:
“We see the economy hitting a soft patch in the first half of the year that results in a more aggressive cutting profile starting in mid year.”
According to the Deutsche Bank report, the first rate cut from the Fed would be 50 basis points after its June meeting. The bank then predicts cuts of an additional 125 basis points until the end of the year.
Fed Rate Cuts Since Last Year
The US Fed has been hiking interest rates since March 2022 to fight rising inflation. In total, the apex bank has added 525 basis points since then. Last March, the Fed raised the interest rate to a 0.50% upper limit, continuously increasing the rates until 5.5% in July, the highest level since 2001. At the September meeting, the Federal Open Market Committee (FOMC) decided to leave rates unchanged. However, the Fed cautioned that more hikes are possible depending on economic data.
After leaving interest rates unchanged for the second consecutive time, the stock market responded with a rally. There were increases across the Nasdaq Composite, the S&P 500 and the Dow Jones Industrial Average (DIJA). In addition, tech stocks, including Nvidia Corp (NASDAQ: NVDA), Micron Technology Inc (NASDAQ: MU), Microsoft Corp (NASDAQ: MSFT), Salesforce Inc (NYSE: CRM), and AMD (NASDAQ: AMD) all rose.
Meanwhile, at least one trader believes that the Fed rate cuts might be larger than Deutsche Bank predicts. According to a Bloomberg report, One wager made via SOFR (secured overnight financing rate) will yield good returns if the interest rate hits 3% by September 2024. With a $13 million premium paid on the wager, Bloomberg predicts that the trader could earn $200 million if SOFR drops to 2%. The bet reflects rate cuts from the Fed, up to a possible 250 basis points.
