As the US economy begins to show signs of a downturn, the Federal Reserve is expected to lower interest rates six times throughout 2024, a recent analysis by ING Economics suggests.

These anticipated rate reductions are seen as a response to a series of economic shifts including softer inflation, a less robust employment sector, and diminishing consumer spending projections.

ING anticipates that these rate cuts, aiming to stimulate economic activity, will commence in the second quarter of 2024 and continue into 2025.

James Knightley, ING’s Chief International Economist, notes, “With the economy experiencing modest growth, alongside diminishing inflation and employment activity, the Federal Reserve is likely to hold back on further policy tightening. However, the future economic outlook is becoming increasingly uncertain.”

According to Knightley’s projections, the rate cuts could total up to 150 basis points, with each cut being 25 basis points.

These reductions would potentially extend into 2025, with additional cuts bringing the effective Federal Funds rate down significantly from its current level.

Unemployment implications and more

Despite these adjustments, their impact on the economy might not be immediate.

The Federal Funds rate changes typically have a delayed effect, often taking 12 to 18 months to influence the economy significantly.

Knightley also observes a cooling but stable job market, with weekly jobless claims remaining low but continuing claims showing an upward trend.

This suggests a shift towards higher unemployment, albeit with companies showing a hesitancy to lay off workers.

On the consumer front, while spending remains strong, challenges loom in 2024.

Households are grappling with stagnant real incomes, rising credit card delinquencies, and the return of student loan payments, all of which could dampen consumer spending.

Knightley remarks, “The data points to a long-term stagnation in real household incomes, counterbalanced until now by dwindling savings and increased debt.

However, with more restrictive credit conditions and higher borrowing costs, the household sector is likely to face significant financial pressure.”

This economic scenario posits a precarious situation for the economy, which could either stabilize with timely rate cuts by the Federal Reserve or potentially face more drastic measures in the event of a recession.

For instance, UBS anticipates that in a recession scenario, the Federal Reserve might resort to a more aggressive rate cut strategy, possibly reducing rates by as much as 275 basis points next year.

Implications for US Indices and the US Dollar:

  1. Impact on US Indices:
    • Potential Market Rally: Lower interest rates often lead to a rally in the stock market, as cheaper borrowing costs can boost corporate profits and consumer spending.
    • Sectoral Shifts: Certain sectors like technology and growth stocks may benefit more from lower rates, while sectors like financials, particularly banks, could face pressure due to narrower interest margins.
    • Volatility Considerations: While initially positive, prolonged low-interest rate environments might lead to increased market volatility, as investors may start to worry about the underlying economic weaknesses prompting these cuts.
  2. Effect on the US Dollar:
    • Potential Depreciation: Interest rate cuts generally lead to a depreciation of the currency, as lower rates decrease the yield on investments denominated in that currency, making it less attractive to foreign investors.
    • Global Investment Flows: A weaker dollar could lead to increased foreign investment in US markets, as US assets become relatively cheaper for international investors.
    • Trade Balance Impact: A weaker dollar can potentially improve the US trade balance by making American exports more competitive abroad, although this effect can be offset by the global economic conditions influencing the trade partners.
    • Inflationary Pressures: A depreciated dollar could contribute to inflationary pressures, as it increases the cost of imported goods and commodities.

Overall, the Federal Reserve’s rate cuts could lead to short-term gains in the US stock market and a decline in the value of the US dollar.

However, these changes also reflect deeper economic trends, and their long-term impact will depend on a variety of global economic factors and investor sentiments.

Summary

ING Economics forecasts that the Federal Reserve will implement a series of interest rate cuts in 2024, responding to an evident slowdown in the US economy.

These cuts are aimed at countering softer inflation, a cooling labor market, and weaker consumer spending trends.

Key Takeaways:

  1. Predicted Rate Cuts: The Federal Reserve is expected to lower interest rates six times in 2024, starting in the second quarter, as a response to a slowing economy.
  2. Total Reduction: The cumulative reduction in interest rates could amount to 150 basis points throughout 2024, with the possibility of further cuts into 2025.
  3. Economic Indicators: The decision is influenced by moderating inflation, a less vigorous job market, and projections of declining consumer spending.
  4. Delayed Impact: Changes in the Federal Funds rate typically take 12 to 18 months to significantly affect the economy.
  5. Consumer Spending Concerns: Challenges for consumer spending in 2024 include stagnant real incomes, rising credit card delinquencies, and the impact of resumed student loan payments.

Happy trading,

Colibri Trader

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