Big banks are split on how fast the Fed will cut interest rates

WALL Street’s biggest banks are divided over how fast and deep the Federal Reserve will cut interest rates over the next year, setting the stage for jittery financial markets until the outlook clears.

Hours after the US central bank surprised most Fed watchers on Wednesday (Sep 18) by cutting its benchmark by half a percentage point, economists at Goldman Sachs Group revised their forecast to show quarter-point reductions at every meeting from November through next June. Peers at JPMorgan Chase, who’d correctly predicted this week’s shift, still see another half-point in November, but say that will depend on the state of the labour market.

In the market, traders are pricing in about 70 basis points worth of easing by the end of the year – and nearly 2 percentage points of rate cuts by next September. That’s more aggressive than the half point of cuts forecast by Fed officials in their latest dot plot by year’s end. 

Here’s what economists at some of the biggest banks are saying:

Bank of America

The Fed “will get pushed into deeper cuts” with another 75 basis points coming in the fourth quarter and 125 basis points next year, economists and strategists including including Aditya Bhave, Mark Cabana and Alex Cohen wrote. 

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Citigroup

Citi kept its forecast for another 75 basis points of reductions this year, with 50 basis points coming in November and 25 basis points in December. “Risks remain balanced to an even faster pace of cuts,” the bank wrote in a note. The bank expects more 25 basis point shifts in 2025, taking the terminal rate to a range of 3 per cent to 3.25 per cent.

Goldman Sachs

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The Fed will opt for a “longer string” of consecutive quarter-point cuts from November through next June, taking the terminal rate to a range of 3.25 per cent to 3.5 per cent, economists including Jan Hatzius wrote in a note. The bank previously expected consecutive cuts at the last two meetings of 2024 and then quarterly moves in 2024. Whether the Fed cuts by 50 basis points again in November is a “close call” and will be determined by the next two employment reports.

JPMorgan

Michael Feroli, the bank’s chief US economist, correctly predicted this week’s half-point cut and is sticking with his view for another one in November. However, he said such a move would be contingent on further softening in the labour market.

Morgan Stanley

Officials will likely opt for a “string” of quarter-point cuts through the middle of 2025, with two this year and four in the first half of next, according to a team including economist Seth Carpenter and strategist Matthew Hornbach.

Wells Fargo

“The 2024 easing cycle starts with historic levels of market uncertainty,” wrote Wells Fargo strategists including Michael Schumacher and Angelo Manolatos. The bank expects that the Fed could ultimately cut by as many as 350 basis points in a hard-landing scenario – or 150 basis points in a soft-landing outcome – in this first year of its cutting cycle. Either way, the bank said that “the Fed has a lot of room to ease.” BLOOMBERG