US Economy's Resilience May Make Fed Cautious About Rate Cuts, Says Barclays

According to Yahoo News, the US economy is expected to remain resilient next year, causing the Federal Reserve to be cautious about rate cuts, according to a Barclays note released on Monday. Consensus forecasts suggest that economic growth will slow significantly, with real GDP growing at an annualized rate of just 0.4% in the first quarter and 0.3% in the second quarter, down from an estimated average of 2.5% in 2023. Despite this, the US is expected to avoid a recession, although the probability remains elevated. Barclays predicts that the Fed will begin a significant easing cycle in the second quarter of 2024, delivering 100 basis point cuts in 2024 and another 100 points in 2025. This implies that the Fed will make four 25-basis-point rate cuts next year. However, analysts at ING and UBS have predicted even more aggressive cuts, with ING forecasting six rate cuts next year and UBS expecting the Fed to cut rates by 275 basis points by the end of 2024. Barclays believes that markets are too pessimistic about the economy's continued resilience, which could fuel inflationary upside. The bank also notes that the outcome of the US presidential election will play a role in where long-dated yields land, as the elected leader's approach to fiscal policy will impact the likelihood of fiscal expansion. A 1 percentage point increase in budget deficits over the next 10 years would increase the fair value of 10-year yields by 25-50 basis points, according to Barclays.