The New York Fed is pricing in a 63% chance the economy could enter a recession by the end of the year.
Bank of America's CEO, Brian Moynihan, revealed that the bank is anticipating four rate cuts by the Federal Reserve in both 2024 and 2025, according to an interview at the World Economic Forum. This projection suggests a total reduction of 200 basis points over the next few years, bringing the Fed's benchmark rate to the 3.25%-3.5% range.
Moynihan argued that these rate cuts are deemed necessary to support the U.S. economy, which has faced a slowdown across various metrics since the Fed increased borrowing costs in 2022 and 2023. Despite the appearance of an aggressive monetary easing pace with eight expected cuts, Moynihan emphasized that such action would still maintain relatively higher rates to manage inflation. He noted that rates were just above 0% during the pandemic years, and had been historically low in the previous decade.
The rationale behind the potential rate cuts is the Fed's readiness to utilize available space to foster economic growth without risking destabilization. Moynihan stressed the importance of initiating cuts unless economic headwinds become too forceful, indicating the Fed's intention to avoid tipping the economy into a downturn.
After a period of raising rates to counter inflation, the Fed has recently paused its tightening efforts. The central bank raised rates by 525 basis points to cool the economy. However, there are concerns that high rates could tighten financial conditions and trigger a recession. New York Fed economists suggest a 63% chance of a recession by the year's end, up from 50-50 odds a month earlier.
As the next policy meeting approaches on January 30, markets currently expect the Fed to maintain interest rates, but there is bullish sentiment for aggressive rate cuts by the year's end. Market indicators, such as the CME FedWatch tool, suggest the possibility of as many as seven cuts.
