Qatar National Bank (QNB) expected that the US Federal Reserve would cut rates by 25 bps twice in 2024, before accelerating the pace of rate cuts in H1-2025.
In its weekly commentary, QNB alluded this to the continuation of the disinflation trend, a rapidly deteriorating labour market, as well as the need to normalize highly restrictive real rates. The commentary reported that the forecasting policy rates in the US has been a challenge in recent quarters, after the aggressive monetary policy tightening stabilised with rates at 5.5 percent. This was due to significant volatility in both growth and inflation expectations.
From late 2023 to early 2024, after a sequence of lower-than-expected inflation prints and weaker GDP growth, markets started to weigh an aggressive schedule of rate cuts. At peak "dovish" expectations in January, markets were pricing close to 200 basis points (bps) in policy rate cuts for this year, QNB highlighted.
QNB affirmed that conditions changed markedly throughout the year as three consecutive months of high inflation prints fueled concerns regarding the disinflation path. This, alongside higher growth expectations, led to a significant re-pricing of short-term interest rates, which were then expected to remain "higher for much longer." Some analysts and investors even considered the possibility of further rate hikes to prevent a sustained re-acceleration of inflation, particularly next year.
It elucidated that there are three main factors sustain QNB's outlook, first, the disinflationary trend in the US is intact and could accelerate further over the coming quarters, reaching the Fed's 2 percent target earlier than previously anticipated. The disinflationary trend has been grounded on supply chain normalization, a moderate slowdown in economic activity, and tighter monetary policy.
Core Personal Consumption Expenditures (PCE) inflation, which excludes volatile prices such as energy and food, fell to a new low of 2.6 percent in June, the slowest pace in more than three years.
The second factor is that softening labour markets suggest not only a lack of more structural price pressures from wages, but also even a potential sharp deceleration of economic activity. Major labour related gauges and surveys, such as the Job Openings and Labor Turnover Survey (JOLTS), the ISM Employment Indices and the Small Businesses Survey, point to quickly deteriorating labour conditions.
In the same context, the commentary highlighted that temporary employment, for example, is contracting, a condition that usually occurs only during economic recessions. The unemployment rate has gone up sharply from 3.4 percent in April 2023 to 4.1 percent in June. But high frequency data from the Kansas City Fed suggests that the unemployment rate could approach 5 percent over the coming months, far surpassing the estimated "balanced full employment" rate of 4 percent. This would then place the Fed behind the curve in achieving its "full employment" mandate, requiring a more proactive monetary policy easing stance.
Regarding the third factor, QNB's commentary indicated that the record monetary tightening cycle has left real interest rates at overly restrictive levels. The real interest rate adjusts nominal interest rates by the level of inflation, and therefore reflects the true hurdle rate by taking into account changes in the prices of goods and services.
Based on these factors, the commentary suggests that the US Federal Reserve may need to ease its monetary policy faster than expected, in an effort to balance economic growth and inflation.
