2024: Why Wall Street’s attention is turning to the Federal Reserve
As fall approaches, Wall Street strategists are gearing up to release their much-anticipated year-ahead forecasts for the S&P 500. However, this year, all eyes seem to be on a different outlook: predictions for the Federal Reserve and when it will begin cutting interest rates in 2024.
UBS strategists made headlines this week by predicting that the Fed will cut rates by 2.75% next year, starting in March. The current fed funds rate sits in a target range of 5.25%-5.50%, the highest since 2001. In contrast, Goldman Sachs’ team expects the Fed to begin lowering interest rates in the fourth quarter of 2024, while Morgan Stanley sees a 100 basis point cut, beginning in June.
The Fed is expected to release updated forecasts for interest rates next month, and as of September, the central bank anticipated raising interest rates by 0.25% in 2023 and cutting interest rates by 0.50% in the following year. However, data from the CME Group suggests that investors now see just a 20% chance of another hike from the Fed this year.
The importance of these forecasts lies in the near unanimity among economists that the Federal Reserve will cut rates in 2024. This high level of confidence means that any surprises in the path interest rates take will likely have a significant impact on financial markets.
The implications for the stock market are complex, as lower interest rates generally result in higher stock prices, but rate cuts in response to a recession can pose challenges. Earnings for the S&P 500 typically fall by 31% over six quarters during a recession, with a recovery taking three years. This makes it difficult to tell a positive story about the stock market when the economy is in a downturn.
Overall, the outlook for the Federal Reserve in 2024 has become the biggest story for Wall Street, essentially overshadowing S&P forecasts, as they are intertwined. It remains to be seen how these forecasts will play out in the coming year and what impact they will have on financial markets.
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