Citi expects US Fed to cut rates by 50 bps every quarter from second quarter of 2024 onwards

The Federal Reserve is likely to initiate a pattern of reducing interest rates by 50 basis points per quarter, commencing from the second quarter of the calendar year 2024 (CY24), as there could be a modest economic downturn in the United States during the first half of the upcoming year.

Nathan Sheets, the Global Chief Economist at Citi, anticipates this move from the US Fed due to the anticipated economic downturn.

A decision to cut rates by 50 basis points (0.50 percent) per quarter represents a substantial move, indicating the central bank's determination to provide ample monetary support to the economy. The US Federal Reserve  plays a crucial role in managing the country's monetary policy, influencing interest rates, inflation, and overall economic stability.

Beginning in the second quarter of 2024, the Federal Reserve's actions will likely be influenced by economic data, inflation trends, and global developments, predicts Sheets.

However, US Fed Chair Jerome Powell had in August shared a stark message regarding the current state of inflation, asserting that it remains "too high" despite some recent declines. Powell, while delivering his keynote speech at the annual Jackson Hole symposium, warned that the US central bank is ready to take additional measures to curb inflation, including raising interest rates further if deemed necessary.

Also Read: Inflation still 'too high,' prepared to hike rates: US Federal Reserve Chairman Jerome Powell

 

According to Sheets, the core projection entails strong economic growth until the conclusion of the third quarter, with a minor slowdown expected in the fourth quarter. Afterwards, there is an anticipation of a couple of negative quarters and a gradual uptick in the unemployment rate in the first half of the next year. Nevertheless, there exists a potential positive aspect for emerging markets during this economic downturn. As the recession begins, it is probable that it will offer an opening for the Federal Reserve to commence a series of rate reductions.

“And that is our expectation that the Fed is going to be cutting at a pace of 50 basis points a quarter starting in the second quarter,” he said.

One of the primary reasons for such aggressive rate cuts could be concerns about economic growth. Sheets' outlook suggests that the Federal Reserve sees the need to spur economic activity and job creation, especially if growth prospects appear sluggish or uncertain. Lowering interest rates can incentivise borrowing, spending, and investment, which are essential components of economic expansion.

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