The US Federal Reserve is likely done with its rate hiking cycle and the central bank is expected to begin a 'mid-cycle adjustment' at the March FOMC meeting that calibrates the nominal funds rate with the disinflation, according to UBS economists.
In an update, they also wrote that as the slowdown in the economy and the extra disinflationary leg begin in earnest, the Fed in the second half of the year is expected to turn to full-on accommodation, with more rate reductions, in line with what it has done historically.
Prompting their forecast is a sharp expected slowdown in economic growth over the next few quarters, with inflation moderating faster than the Fed expects in 2024.
The economists at UBS also point to the historically wide budget deficit, a coming presidential election, and a fractured political landscape that implies little room for cyclical fiscal support.
Looking further ahead, they expect monetary policy easing next year to drive recovery in 2025, pushing GDP growth back up to roughly 2-1/2%, limiting the peak in the unemployment rate to 5.2% in early 2025.
Contact Sean at sean@proactiveinvestors.com