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US Federal Reserve will slash interest rates in March 2024, Morgan Stanley bets

Over recent weeks, central bankers have been pushing back against the market expectation that the battle against inflation is nearing its conclusion.
Over recent weeks, central bankers have been pushing back against the market expectation that the battle against inflation is nearing its conclusion.

The US Federal Reserve will in the early part of next year slash interest rates for the first time since the onset of the Covid-19 crisis, Wall Street analysts are betting,

Researchers at Morgan Stanley have said they expect the federal open market committee (FOMC) to bring rates down in the first quarter of 2024, which would be the first cut since March 2020 when the world’s most influential central bank eased rates to cushion the blow from the virus sweeping across the globe.

Monetary loosening will not take place until the Fed sends the federal funds rate – the global financial system’s benchmark interest rate – to a peak of 5.25 per cent and 5.5 per cent on 27 July.

“We have pencilled in March 2024 [for the first rate cut], when we think the trend down in inflation will give the Fed enough comfort that we are bound for the target,” Seth Carpenter, an analyst at investment bank Morgan Stanley, said.

Inflation in the world’s largest economy has been falling steadily since it reached a peak of just over nine per cent last summer. Figures last week revealed the rate of price increases trimmed to its lowest level in over two years, down to three per cent.

That decline has raised expectations that the FOMC will back a final rise at its meeting later this month and then keep rates at their peak until around the middle of next year.

“Last week’s CPI print indeed was music to the ears of the Fed and markets,” Carpenter added.

There is an emerging consensus in Wall Street that the US economy is on track to swerve a recession.

Unemployment is low, wages are rising despite easing growth and demand for workers remains high, supporting economic activity.

Britain and the US’s inflation experience have diverged significantly in recent months. While America’s rate has dropped, inflation remained stuck at 8.7 per cent in May. Office for National Statistics figures on Wednesday are tipped to show the cost of living fell to 8.2 per cent in June.

As a result, traders think the Bank of England will lift UK borrowing costs to a peak of around 6.25 per cent and won’t cut them until deep into 2024, possibly even 2025.