HSBC Asset says Fed to cut rates by full point as growth expected to falter

The Federal Reserve will reverse course and cut interest rates sooner and more aggressively than money markets forecast this year as signs of a US economic recession emerge, according to HSBC Asset Management.

Joe Little, the firm’s global chief strategist, says policymakers may cut rates by a full percentage point before the end of the year, double the half-point easing that is currently priced in US swaps. He also flags another 200 basis points of cuts in 2024.

The Fed has been in a stand-off with markets, which are betting that policy makers will cut rates later this year despite Chairman Jerome Powell’s insistence that they need to keep rising and stay elevated to calm ongoing price pressures. Yields on two-year Treasuries, the maturity most sensitive to policy changes, have tumbled from a 15-year high reached in November, but Little says markets are still not pricing enough easing.

“If we see the recession data really crystallising in the third quarter, we think it’s quite easy to get 100 basis points or more of cuts from the Fed during the final part of 2023,” said Little. “Important to note that there’s an unusual amount of uncertainty about the policy trajectory given how strange this economic cycle has been.”

The US central bank is widely expected to slow its pace of hikes to 25 basis points this week, taking the upper bound rate to 4.75 per cent, as inflation eases. The Fed has lifted borrowing costs by 425 basis points in less than a year, the most aggressive tightening campaign since the 1990s, and money markets forecast that same rate to peak at 5.1 per cent by June. 

Little says weakening consumer demand, as shown in data released last week, will weigh on US activity and cause two or three consecutive quarters of economic contraction. His view clashes with economists from Goldman Sachs Group to the International Monetary Fund, who recently said the US will avoid a recession this year. 

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The HSBC Asset Management strategist says the Fed will probably cut rates more aggressively than the European Central Bank, which he expects will hike up to 3.5 per cent this year before delivering 200 to 250 basis points in easing, mostly in 2024. Similarly, he sees the Bank of England’s official rate peaking at 4.5 per cent this year, and around 250 basis points of cuts next year.

“The bond market assumes ‘immaculate disinflation’ and a very soft landing,” Little said. “There’s not much of a recession-type policy response baked into interest-rate futures or curves.” BLOOMBERG