Markets are gaining today in euphoria following yesterday's dovish Fed decision. However, there is also speculation that the Fed "knows more," which led to the larger rate cut. Although these are still speculations, the hard data from the U.S. economy does not yet indicate a deeper slowdown.
Today, we have seen several updates to economic forecasts from financial institutions that have taken the Fed's new stance into account. Surprisingly, Fitch's new forecast appears somewhat at odds with the Fed's optimistic outlook. Fitch Ratings predicts a significant slowdown in U.S. economic growth in 2025 following the Federal Reserve's rate cuts, as well as slower growth in state budget revenues. Fitch highlights the labor market and employment growth, both of which are already slowing down, with states transitioning from a period of dynamic growth to a new normal of moderate expansion. Fitch emphasizes that the recent fiscal resilience built by states has helped them smoothly adapt to changing economic conditions.
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Fitch Ratings notes that while Federal Reserve rate cuts alleviate some pressure on the U.S. housing market, mortgage rates are unlikely to fall below 5.0% before 2027. The current spread between 30-year mortgage rates and 10-year Treasury yields remains elevated, reflecting increased prepayment risks and reduced holdings of mortgage-backed securities by the Fed.
Today's labor market data does not yet confirm a rebound in the secondary market (inverted axis). However, the recent sharp decline in mortgage rates (-11% y/y) will begin to positively impact the housing market in the coming months.
Demand for residential real estate has decreased, and the low level of inventory continues to limit sales. However, further declines in mortgage rates will likely positively stimulate demand in this market.
Interest Rate Forecasts by Institution
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Citi Bank was one of the few banks to predict a 50 basis point Fed rate cut in September. The bank now expects that aggressive monetary easing will continue in upcoming meetings and does not rule out another 50 basis point cut.
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JPMorgan forecasts another 50 basis point rate cut in November, but this could change depending on weaker labor market data from upcoming employment reports.
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Goldman Sachs anticipates a longer series of quarter-point rate cuts from November through June 2025, with the decision between a quarter- or half-point cut in November depending on future employment reports.
As seen, forecasts have changed dramatically compared to the period before yesterday's conference. The market now expects between 50 and 75 basis points of cuts over the next two meetings by the end of 2024. Dovish projections are currently supporting the stock market, with gains particularly visible in smaller companies (US2000) and the cryptocurrency market.
