Half of 10 US Investment Banks Still Predict "Recession Next Year"... June Rate Cut Expected

Expectations for a soft landing of the U.S. economy next year are growing, but recession forecasts still persist. Half of the 10 Wall Street investment banks, including Wells Fargo and Deutsche Bank, predicted that the U.S. economy will inevitably experience a mild recession due to the cumulative effects of tightening. The most common forecast for the Federal Reserve's (Fed) rate cut timing was June next year.

According to the "2023 U.S. Economic Trends and 2024 Outlook" compiled by the Bank of Korea's New York office on the 21st (local time), among the 10 Wall Street investment banks, Citi, Wells Fargo, Deutsche Bank, Nomura, and TD Securities have presented recession forecasts for next year. On the other hand, Barclays, Bank of America (BoA), and JP Morgan expect the U.S. economy to achieve a soft landing with inflation slowing down without a recession. Morgan Stanley and Goldman Sachs went further by forecasting a no landing scenario, where growth continues without a pause.

The Bank of Korea's New York office stated, "Half of the major investment banks, like the Fed, are forecasting a soft landing," adding, "However, the other half generally expect a mild recession next year, centered on vulnerable sectors, as the supply-side tailwinds dissipate and the cumulative effects of monetary policy emerge."

In the market, the outlook for a soft landing has gained more traction following the December Federal Open Market Committee (FOMC) meeting. Nevertheless, recession concerns on Wall Street persist due to factors such as a slowdown in consumer spending?which accounts for 70% of U.S. economic activity?depletion of additional savings accumulated during the pandemic, resumption of student loan repayments, cooling employment, and refinancing difficulties caused by credit tightening.

Andrew Hollenhorst, an economist at Citigroup, explained, "I believe the cumulative rate hikes are finally showing their effect in slowing the U.S. economy," noting, "There are increasing signs of employment slowdown in the labor market, such as rising unemployment rates and increased unemployment insurance claims." Sam Bullard, chief economist at Wells Fargo, also expressed surprise at the economy's resilience this year but pointed out, "Labor market weakness will eventually lead to a decline in consumer spending." However, he acknowledged that "the recession in 2024 is expected to be mild," indicating that the U.S. economy still has a path to avoid a severe downturn.

Most major Wall Street investment banks have identified June as the starting point for rate cuts next year. Six out of the 10 investment banks, including Barclays, JP Morgan, and Wells Fargo, made this forecast. Nomura expects insurance rate cuts to begin in June ahead of a recession in the third quarter of next year. Goldman Sachs and BoA forecast the first rate cuts as early as March next year, while TD Securities expects May. Some investment banks have also expanded their projections for the size of rate cuts following the dovish December FOMC meeting. Barclays, which had anticipated a 25 basis point (bp) cut over the year (1 bp = 0.01 percentage points), revised its forecast to 75 bp in line with the Fed's new dot plot. BoA increased its forecast from 75 bp to 100 bp, and Goldman Sachs from 25 bp to 125 bp.

Examining these investment banks' forecasts reveals that the possibility of a recession influences the magnitude of rate cuts. According to the Bank of Korea's New York office, institutions expecting a soft landing anticipate an average rate cut of 105 bp, whereas those forecasting a hard landing expect an average cut of 155 bp. The office analyzed, "The difference in cut sizes is due to the expectation of at least one big 50 bp cut during a recession," adding, "Within each group, investment banks with lower inflation forecasts tend to predict larger rate cuts." Additionally, there are forecasts within Wall Street that rate cuts may occur earlier to avoid political controversies related to the U.S. presidential election scheduled for November next year.

The timing of quantitative tightening (QT) reduction also varied slightly depending on recession expectations. Five investment banks anticipating a recession next year believe QT will likely end alongside the start of rate cuts. Conversely, the other five banks forecasting a soft landing expect QT to end sometime in 2024 or to be scaled down from the second half of the year, concluding in the first quarter of 2025, depending on excess liquidity in the market.

This content was produced with the assistance of AI translation services.