UBS Predicts Multiple Interest Rate Cuts by the Federal Reserve in 2024 Amid Economic Downturn 

In what may be a bright spot in an otherwise gloomy commercial real estate outlook, UBS envisions a decelerating U.S. economy leading to significant Federal Reserve rate cuts in 2024. This outlook is grounded in factors such as rising unemployment rates, a trend toward disinflation, and a substantial credit withdrawal from the economy, the largest since the financial crisis.

Key Points: 

– UBS forecasts a reduction in the Fed’s benchmark rate to a range of 2.50% to 2.75% by the end of 2024 due to a decelerating economy, increasing unemployment rates, and a trend towards disinflation. 

Arend Kapteyn, Chief Economist at UBS, indicates that the economic starting point is notably poorer compared to a year ago, especially with a significant withdrawal of credit from the U.S. economy, the largest seen since the financial crisis. 

Significant Rate Cuts on the Horizon? 

Switzerland-based investment bank and financial services firm UBS is envisioning an aggressive series of Federal Reserve rate cuts in 2024 which could amount to a total decrease of 275 basis points. This predicted move counters the market consensus, which has a more conservative outlook. UBS’s prognosis is based on an anticipated recession in the U.S. 

According to a report released by UBS on Monday, even though the U.S. economy has demonstrated resilience in 2023, it faces the same challenges as before, with fewer growth supports expected in 2024. The bank’s economists anticipate that the downward trends in inflation and the labor market will result in the Federal Open Market Committee reducing rates steadily throughout the year. 

Rates Stabilized…For Now 

The FOMC increased rates 11 times from March 2022 to July 2023, boosting the federal funds rate range to 5.25%-5.5%. Although rates have stabilized for the time being, market conversations revolve around when and how the Fed will lower them. Nonetheless, Jerome Powell, the Fed Chairman, recently expressed uncertainty about the sufficiency of measures taken to tackle inflation and its return to the 2% target. 

Despite a strong rate hike effort, UBS points out that the U.S. has still seen real GDP growth reach 2.9% as of Q3’s end. However, concerns about growth have resurged due to falling stock markets and higher yields. 

For a counterpoint to predictions made by UBS, read this Finance Lobby CRE Insights piece on US banks witnessing the highest surge in overdue commercial property loans in the last decade.

High Interest Rates Taking a Toll 

UBS emphasized the progressively challenging environment brought on by higher interest rates, which includes tightening credit and lending conditions, along with decreasing labor market income. In fact, US banks are currently witnessing the highest surge in overdue commercial property loans in the last decade, something we covered here on the CRE Insights blog earlier this week. They also noted a high level of spending compared to income, buoyed temporarily by fiscal stimulus and savings.  

For 2024, UBS predicts a 0.5% mid-year contraction and an annual growth rate of just 0.3%, with unemployment climbing to around 5% by year-end. They expect a recovery driven by monetary policy easing in 2025, with GDP growth rebounding to about 2.5% and unemployment peaking at 5.2% in early 2025. A slowing trend is forecasted for 2026, partially attributed to projected fiscal tightening. 

UBS’s Kapteyn, while speaking to CNBC, highlighted the severe credit shortfall in the U.S. economy, comparing it to conditions during the global financial crisis. This significant credit pullback is already reflected in economic data, including margin squeezes which may lead to layoffs. Kapteyn also mentioned a disconnect between real incomes and spending, with real income growth lagging behind debt service increases for U.S. households. 

While UBS maintains a cautious stance with expectations of an imminent recession, Goldman Sachs is more optimistic about U.S. economic growth in 2024, projecting a 2.1% expansion. Goldman’s Kamakshya Trivedi believes in strong real income growth and a recovering industrial cycle, which could lead the Fed to maintain current rate levels. 

Read the full report at UBS, here: Is the US economy set for another Roaring ’20s? 

November 22, 2023