Citi analysts have issued a striking forecast, anticipating that the Federal Reserve will embark on a series of interest rate cuts beginning in September 2024. According to their projections, the Fed is set to reduce rates by 25 basis points (bps) eight times, resulting in a total reduction of 200 bps by July 2025. This move would lower the benchmark interest rate from its current range of 5.25%-5.5% to a more accommodative 3.25%-3.5%.
The primary drivers behind this expected series of cuts include signs of an economic slowdown, weakening inflation, rising unemployment rates, and a negative reading on the service sector index.
Economic Indicators Signal Change
Slowing Economic Growth
Citi’s analysts point to an economic slowdown as a major factor prompting the anticipated rate cuts. Various economic indicators suggest that growth is losing momentum, necessitating a more accommodative monetary policy to support economic activity.
Declining Inflation
Another key factor in Citi’s forecast is the weakening inflationary pressures. With inflation showing signs of easing, the Fed might find more room to maneuver and cut rates to stimulate the economy without the fear of igniting runaway inflation.
Rising Unemployment
Rising unemployment rates are also contributing to Citi’s prediction. As joblessness increases, the Fed is likely to lower interest rates to spur job creation and support consumer spending.
Negative Service Sector Index
Finally, a negative service sector index further supports the case for rate cuts. A contraction in the service sector, which is a significant part of the U.S. economy, would likely push the Fed towards a more accommodative stance to prevent a broader economic downturn.
Looking Ahead
Citi’s forecast of substantial rate cuts reflects a cautious outlook on the U.S. economy. If their predictions hold true, the Fed’s actions could have wide-reaching implications for various sectors, including housing, consumer finance, and investment markets
Source