This Wall Street firm has set its Fed forecast for this year – it now expects a surprise in 2025

By Steve Goldstein

Citi’s economic team says the Fed will cut rates to a range between 3% and 3.25%

The big economic story for 2024, at least as far as markets are concerned, has been the recession that never happened. The American economy, for the third year in a row, will grow by at least 2.5%, probably more like 2.7% in the end.

Citi’s economics team, led by Andrew Hollenhorst, admits that its prediction of an outright contraction in the US economy was completely wrong. “Our main mistake was to underestimate the extent to which rising net worth of high-income individuals and easy financial conditions for large businesses would continue to boost activity,” they say.

But they got other decisions right – accurately forecasting stubbornly high inflation and 100 basis points of Fed easing (assuming, like virtually everyone else, that the central bank would cut a quarter point of next week) – which led the team to give themselves a B grade for the exercise. year.

They’re now laying out their vision for 2025. And the vision isn’t pretty: They expect companies to move from cutting hiring to outright layoffs. And this in turn will lead to a decline in consumer spending and business investment. They say that even if they are wrong about the layoffs, spending remains threatened by the slowdown in income growth that accompanies a slowdown in hiring. They do expect that a loosening labor market will reduce inflationary pressures in the services sector, while slowing global conditions will dampen goods prices.

They say this will lead to aggressive action by the Fed, planning quarter-point interest rate cuts at each meeting through July, to bring the federal funds rate back to between 3% and 3%. .25%. This is well below market expectations, which predict that the federal funds rate will then be around 4%.

If long-term rates fell, it would help the hard-hit housing and manufacturing sectors, but not by much, economists say. “If the labor market develops as we hope with a sharper rise in the unemployment rate, weaker consumer health would weigh against any demand boost from lower rates,” they say.

The arrival of a new administration does not change their vision much, either positively or negatively. They argue that a slowdown in immigration will lead to a decrease in the supply of new workers, but this will be offset by a drop in demand for labor. A across-the-board tariff of 10% would only increase inflation by a few tenths of a percentage point and would not have a major impact on growth, they say. Reducing corporate tax rates to 15% could be offset by tariffs, meaning no net new fiscal stimulus.

Nor do they expect miracles when it comes to the deficit. They expect it to rise to 6.2% of GDP, which is quite close to this year’s 6.4%, well above the 3.6% average of the previous 21 years. the pandemic.

The market

US stock futures (ES00) (NQ00) traded higher, following six sessions of losses for the Dow DJIA industrial index.

   Key asset performance                                                Last       5d      1m     YTD     1y 
   S&P 500                                                              6051.25    -0.39%  1.72%  26.87%  28.22% 
   Nasdaq Composite                                                     19,902.84  1.03%   4.16%  32.59%  34.83% 
   10-year Treasury                                                     4.343      14.00   -7.80  46.21   40.41 
   Gold                                                                 2686.1     1.18%   4.62%  29.65%  32.07% 
   Oil                                                                  70.88      5.52%   5.87%  -0.63%  -1.25% 
   Data: MarketWatch. Treasury yields change expressed in basis points 

The buzz

Chipmaker Broadcom (AVGO) is poised to become a $1 trillion company after well-received results.

Costco Wholesale (COST) missed sales estimates for the second quarter in a row.

RH (RH) stock soared on the furniture retailer’s revenue growth prospects.

The Nasdaq-100 is reconstituted, during an announcement which traditionally comes after the close of the markets.

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The graph

Goldman Sachs tactical strategist Scott Rubner says U.S. stocks saw $186 billion in inflows over the past nine weeks, the largest inflow on record. He says this is the best seasonal time of year for U.S. stocks, but he also sees a slowdown in the stock market in the second half of January as the risk of overshooting remains high.

Best Tickers

Here are the most active stock tickers as of 6 a.m. Eastern Time.

   Ticker  Security name 
   TSLA    Tesla 
   NVDA    Nvidia 
   GME     GameStop 
   AVGO    Broadcom 
   PLTR    Palantir Technologies 
   MSTR    MicroStrategy 
   AAPL    Apple 
   AMZN    Amazon.com 
   AMD     Advanced Micro Devices 
   SMCI    Super Micro Computer 

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-Steve Goldstein

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  13/12/24 0806ET
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