Everyone is guessing: at what point next year, the Fed will cut interest rates?

In the coming 2024, the United States is likely to complete the transition from interest rate hikes to interest rate cuts, and investors are keeping an eye on the following 8 days when the Federal Reserve announces its interest rate decision.

• 31 January

• 20 March

• May 1

• 12 June

• 31 July

• 18 September

• 7 November

• 18 December

And the most important time point is - May 1 (May 2, Beijing time).

The minutes of the recently released Federal Reserve Federal Reserve's November monetary policy meeting showed that Fed officials once again collectively believe that the current economic conditions are more suitable for keeping interest rates high for some time, reiterating that they will proceed cautiously and have no intention of ending the rate hike cycle.

The remarks made the market even more curious: when is the Fed most likely to act in 2024, and how much will it cut?

According to CME FedWatch data, the current market sees a 60% chance that the Fed will start a rate cut cycle in May next year, and rates are expected to fall by about 100 basis points by the end of 2024.

At present, the bond market expects the Fed to cut interest rates by 92 basis points next year, which is much higher than Fed officials' expectations of a 50 basis point rate cut next year.

Analysts generally believe that the divergence between the "optimistic" market and the Fed's interest rate policy stance in 2024 will undoubtedly increase the complexity of the Fed's actions next year, and it will not be easy to accurately predict when the Fed will act.

The majority of the market believes that May 1 is likely to be a turning point in the Fed's current rate hike cycle, and the Fed currently believes that the turning point will occur in the fourth quarter of next year.

HSBC believes that the timing of the trigger will likely occur in the third quarter of 2024, while the Morgan Stanley team believes that the Fed will start cutting interest rates in June 2024, and will cut interest rates by 25 basis points at each meeting after September 2024 and the fourth quarter of 2024, and 75 basis points for the whole of 2024.

Therefore, for the market, there may be "surprises" at every interest rate meeting next year.

The Mini Program will provide 366 days a year of service, real-time updates of the blockbuster schedule, daily punctual reminders, in the next year's 8 interest rate meetings, what need to be focused on, and what "surprises" or "fright" may shake the market, so that you can always be one step ahead.

The Fed has reached the stage of "raising interest rates with its mouth".

Analysts generally believe that the Fed's November minutes, which used the word "careful" more frequently, were only intended to maintain "ostensibly hawkish rhetoric", but in fact the rate hike cycle is over.

The Taochuan team of Soochow Securities bluntly said that there is still suspense about the "last interest rate hike" at the Federal Reserve's November meeting, but this is actually "unfavorable". The Fed has reached a stage of "talking but not doing", so it is likely that it will not be able to cash in on this "last rate hike", so it will always retain the "suspense" of a rate hike to guide the financial market to tighten, so as to finally achieve a "soft landing".

Fed officials' remarks were "unanimous" and refused to rule out the possibility of another rate hike, more to calm the market's euphoria and make the market not happy too soon so as not to mess up the task of fighting inflation. Previously, some analysts pointed out that both official speeches and the disclosure of key economic data are part of the Fed's expectations management.

Powell has also been cracking down on speculation recently, most recently during a panel discussion at the International Monetary Fund (IMF) on November 10.

Powell said continued progress towards the 2% target is uncertain and inflation data is sometimes smeared.

When will the rate cut come?

HSBC outlines 4 macro conditions that could allow the Fed to start a rate cut cycle:

(i) GDP growth is below the long-term trend, (ii) unemployment rises above the "equilibrium" level (or shows signs of a clear cooling in the labour market, such as a decline in job openings), ;(iii) wage growth falls to 3.5% (which HSBC believes is in line with 2% inflation), ;(iv) core inflation falls below 3% and, crucially, is clearly on a downward trend to 2%.

1) From the first point, what factors will drive the US economic slowdown next year?

Some analysts have pointed out that if the Fed can pivot in time, the United States may still avoid a recession, assuming that there is no large-scale financial market turmoil in the next two quarters, then the quarter-on-quarter GDP growth rate of the United States in the second half of next year may further drop to below 0.5%, or even close to zero.

First of all, with the slowdown in the growth rate of household income and the fading of the supporting effect of excess savings, the month-on-month growth rate of US household consumption may fall to about zero in the second half of next year.

Analysts judge that if the average monthly consumption rate of 70.8 billion US dollars since July 2022 is simply and linearly extrapolated, excess savings, especially for low- and middle-income people, may be exhausted in the first half of next year.

Second, the drag on corporate investment from tighter financial conditions is likely to be more pronounced next year. Analysts pointed out that with the tightening of financing conditions, U.S. corporate non-residential investment has begun to fall by 0.1% quarter-on-quarter in the third quarter of this year, and it is expected that the quarter-on-quarter decline in corporate non-residential investment may widen from the fourth quarter of this year to the second quarter of next year.

Third, property transaction and investment growth is likely to cool in the second half of next year. With the rise in long-term Treasury bond interest rates, the U.S. mortgage interest rate has recently climbed to a high of 7.8%, which has dragged down residents' housing purchasing power to a certain extent.

Therefore, when the Fed maintains its long-term growth forecast at 1.8%, and the actual growth rate is significantly lower than the potential growth rate for 2-3 consecutive quarters, this will turn the output gap (an economic measure of the gap between an economy's actual output and its potential output) negative, and also imply spare capacity due to weak demand, which will further cool core inflation.

2) The labor market has cooled and non-farm payrolls growth has returned to below trend

The continued weakness in aggregate demand is likely to eventually lead to fewer hiring, higher layoffs and higher unemployment, and once the unemployment rate exceeds the non-accelerating inflation unemployment rate (NAIRU), indicating that the labor market may no longer be overheated, wage growth is expected to eventually slow and tend to fall below the 2% inflation level.

However, if the unemployment rate remains stable or even gradually declines, then central banks may need to wait for other signs of easing in the labor market to support a cooling of the labor market, such as fewer job openings and slower nonfarm payrolls.

3) Wage growth slows to 3.5% (matching 2% inflation)

If the cooling of the labor market starts to lead to lower wage growth, the next key question is, what wage growth rate will match the 2% inflation rate?

HSBC sees the "magic number" at around 3.5%, while modelling forecasts expect wage growth to fall back to 3.7% in the second quarter of 2024, close to the wage growth rate that matches 2% inflation.

Given that the job market continues to cool, wage growth is expected to fall back below 4% in 2024. The turnover rate is one of the best leading indicators of wage growth in the United States, leading the Atlanta Fed's Wage Tracker (WGT) by eight months.

The turnover rate in August 2023 has fallen back to 2019 levels, indicating that the Atlanta Fed's WGT is on track to return to 2019 levels (3.7%) in the second quarter of 2024, just above 3.4%. This means that inflationary pressures from wage growth are expected to ease significantly by the second quarter of 2024.

4) Core inflation grew at less than 3% year-on-year and gradually declined to 2%

As things stand, core inflation (excluding energy and food prices) is key to whether headline inflation can come down, as food and energy price shocks should generally "disappear" in the medium term.

HSBC believes that like wages, core inflation will also fall slowly. Therefore, core inflation does not need to be as low as 2% to trigger a rate cut, and when core inflation is below 3% and is in a downward channel, it may be enough for the Fed to start a rate cut cycle, which is expected to be in the second quarter of next year.

Experiences help you keep an eye on the Fed's next move

2024 is coming, helping you get ahead of when the Fed will pivot.

For more information, please visit the official website of Wall Street.