The Fed will slash rates by 200 basis points by mid-2024 after staying hawkish in the short term, Deutsche Bank says




Federal Reserve Jerome Powell
Federal Reserve Jerome Powell  
  • The Fed will cut interest rates by 200 basis points by the middle of 2024, according to Deutsche Bank.

  • But analysts expects the central bank to remain hawkish in the near-term.

  • Deutsche Bank increased its view on the terminal rate and now sees it hitting 5.1% in May.

The Federal Reserve will remain hawkish in the short term but will cut benchmark rates sharply after that, according to a Monday note from Deutsche Bank.

The central bank has hiked rates by 375 basis points so far this year, with another half-point increase widely expected next month. Even more tightening will come, with analysts at Deutsche Bank increasing their view on the terminal rate, which they now see hitting 5.1% in May.

"Risks remain skewed to the upside, and we caution that the transition to pausing and eventual cuts may not be entirely linear," the note said. "If elevated inflation and labor market imbalances persist, or financial conditions fail to tighten, a higher terminal rate could be needed."

Meanwhile, the economy will slow down amid the aggressive tightening, and Deutsche Bank sees an 80% probability of a recession in the next year.

Analysts anticipate a moderate recession beginning mid-2023, with real GDP falling about 1.25 percentage
points over three quarters and the unemployment rate reaching a peak of 5.5%.

"With a sharp rise in the unemployment rate and inflation showing clearer signs of progress, the Fed should cut rates by 200bps by mid-2024 when it approaches a neutral level around 3%," analysts said. "QT should cease when the Fed cuts rates, to ensure both tools are not working in competing directions. Balance sheet drawdown could be modified or halted earlier if reserves continue to fall faster than expected."

The first rate cut will be 50 basis points in December 2023, followed by 150 basis points of cuts into 2024, the note said.

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