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Banking giant predicts sharp interest rate cuts as economy heads for crash

Banking giant predicts sharp interest rate cuts as economy heads for crash

The debate on whether the Federal Reserve (FED) will start cutting the decade-high interest rates in 2024 has been raging since at least 2023. 

Though hopes were high late last year that reductions would soon begin, reheating inflation in the initial months of this year has slashed the hopes somewhat.

Subsequently, the debate grew even fiercer, with the stock market apparently behaving paradoxically as major benchmark indices such as the S&P 500 rose to record highs in an environment that should theoretically lead to a slowdown. 

S&P 500 YTD price chart. Source: Google

The situation has even led some prominent investors to believe that a reduction in interest rates could be the straw that breaks the camel’s back, leading to a full-blown bubble and then to a crash.

By July 9, however, with inflation again apparently being more manageable and with fears that the U.S. economy may be headed for a significant slowdown, bold funds rate predictions have again emerged.

FED is now forecast to cut interest rates by 200 BPS across 8 meetings

Indeed, on Friday, July 5, Citi (NYSE: C) sent a note stating that there have been increased signs of a slowing economy and that the FED is likely to start aggressively cutting interest rates.

The note focused on job reports, which, while acknowledged as being strong at face value, are considered problematic once matters like losses of temporary services jobs are considered. 

Such measures are frequently a canary in the coal mine as they may be a sign that employers are trying to cut costs by firing the least protected workers ahead of a probable recession.

According to Citi, the situation is likely to lead the FED to attempt to stimulate the economy by reducing the costs of borrowing. The American central bank is forecast to reduce interest rates by as much as 200 points – bringing them down to between 3.25% and 3.50% – over the next 8 FOMC meetings.

Banks warn investors are too bullish on the stock market

CME Group’s (NYSE: CME) assessment seems to be in concordance with Citi’s, given that it is, at press time, estimating a 73.6% probability that the September meeting will bring a funds rate reduction to between 5% and 5.25% from the now long-standing rate of 5.25% to 5.50%.

Fed Watch forecast for September meeting. Source: CME Group

Additionally, major banks have, indeed, recently started again warning that analysts and investors alike are overly bullish and that a substantial correction may be imminent – a likely scenario given the deluge of experts warning of a major bubble that is about to pop.

Finally, the systemic risks hinting at both a possible crash and possible upcoming interest rates appear to have grown so much that even the International Monetary Fund (IMF) has started warning the U.S. of an urgent need to address them.

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