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- The US economy could slip into a surprise recession in 2024, Morgan Stanley warned.
- The Fed and Treasury merely delayed a recession this year by propping up economic growth.
- The Fed could slash interest rates next year as a downturn strikes.
The US economy could be in for a surprise recession in 2024 that will put pressure on the Fed to drag interest rates lower, according to Morgan Stanley strategists.
The bank listed its "Top 10 Surprises for 2024" in a note earlier this month, and among them is that a hard landing "arrives in style."
"The biggest surprise of 2024 may be that the elusive hard landing finally arrives after all – just after most investors concluded that 'this time was different indeed,'" the bank said. "It took most of the year for the consensus to fully embrace the soft landing narrative – a consistent feature of our base case since 2022. But it won't take that long for investors to kick themselves for having been fooled again."
The Federal Reserve's rate hikes and the US Treasury's debt issuance effectively added economic stimulus in 2023 via more interest payments, strategists said. But that will switch to a drag on growth next year.
That's because monetary policy will get more restrictive in real terms in 2024, given benchmark rates tend to come down more slowly than inflation, Morgan Stanley explained.
"The surprise for 2024 comes in how the combination of increasing policy restraint around the world, the loss of US federal government fiscal policy support, and the heightened uncertainty related to the US general election push the economy into a hard landing," the note said.
Some signs of weakness have already emerged up as interest rates remain elevated. The labor market has steadily weakened for most of the year. Meanwhile, consumer spending looks to be slowing down, which easily could push the economy into the long-awaited downturn.
That's likely to push the Fed to rapidly cut interest rates 2024, Morgan Stanley predicted. Strategists forecasted two 25-basis-point rate cuts in March and May, followed by a series of 50-basis-point rate cuts through the rest of the year.
Those cuts could take the Fed's rate target as low at 2.25%-2.5% in 2024, and it could hit 1.5%-1.75% in 2025, where they were at the start of the pandemic — "metaphorically bringing to an end an unforgettable chapter in our lives."