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Goldman's Joshua Schiffrin predicts 4 fed rate cuts in 2024
AInvestTuesday, Jan 23, 2024 2:53 am ET
2min read

Joshua Schiffrin, global head of trading strategy at Goldman Sachs, says the Federal Reserve will cut interest rates four times this year, starting in March, and inflation will reach the Fed's 2% target.

Joshua Schiffrin, who correctly predicted a soft landing for the US economy last year, expects the European Central Bank and the Bank of England to follow suit. However, Schiffrin says the Bank of Japan will buck the trend and raise rates in April.

While risk assets are generally set to rise this year, Schiffrin warned that the first half of the year will be difficult to navigate as markets continue to fluctuate in their bets on the timing and pace of Fed rate cuts. He advised investors to look for opportunities in emerging markets such as Turkey and to consider Chinese equities as an investment.

The first half of 2024 will be a different kind of year than the past four with choppy rangebound markets and no giant trends, Schiffrin said. The central banks' ease will dominate the storylines but that may be hard to trade given how much is priced.

Bond traders have lowered their expectations for a Fed rate cut following a string of better-than-expected economic data. Last December, a rate cut in March 2024 was seen as a done deal. Now the implied probability has fallen to around 40%. Throughout 2024, the swap market expects the Fed to cut rates by a total of 135 basis points, compared with Schiffrin's forecast of 100 basis points.

Geopolitical tensions have led to disruptions in Red Sea shipping, but are unlikely to stop the overall downward trend in price pressures, Schiffrin said. Looking ahead, the Fed may adjust its inflation target for next year to a range of 1.5% to 2.5% once the 2% target is reached, Schiffrin said.

Federal Reserve Chairman Jerome Powell and his colleagues will hold a policy meeting next week and are expected to leave interest rates unchanged for a fourth straight meeting.

 I believe very much in a March cut, Schiffrin said. I think they recognize there are a lot of benefits to starting on the sooner side – they can then likely go gradually and speed up the pace of cutting if the economy really weakens, but such a plan would reduce the chance they get meaningfully behind the curve. And of course they can always stop the cuts at a still restrictive level.

Schiffrin's prediction of a soft landing a year ago proved prescient. Back then, when most investors and economists were worried about rising inflation and a looming recession, he was much more optimistic. In the end, the US economy continued to grow steadily, with the annualized growth rate of the Consumer Price Index (CPI) falling from 6.4% to 3.4%.

In January last year, he also called on the Bank of Japan to eliminate its policy of containing long-term borrowing costs by controlling the yield curve. Nine months later, with rising US Treasury yields pushing up global interest rates, the Bank of Japan has indicated that it will raise interest rates in the near future.

Schiffrin admits that his forecasts for other events in 2023 were worse. He underestimated the size of the Fed's rate hike and misjudged that the Bank of England would be the first major central bank to cut rates. His prediction of a stronger yen against the dollar also failed to materialize.

Looking ahead, Schiffrin expects US Treasury yields to rise by 20 basis points rather than fall, given the steady growth trajectory. One of his out-of-consensus bets: long China.

Chinese stocks will have a great year and surprise everyone. There is just so much bearishness there, he wrote. I would suggest doing this in options.

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