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The Federal Reserve will cut rates more aggressively than markets are currently pricing in as a mild U.S. recession arrives in the first half of next year, economists at Deutsche Bank projected on Monday.

In an outlook report, the Deutsche Bank economists projected 175 basis points in rate cuts in 2024.

With the Fed rate currently at 5.25%-5.5%, that would reduce the rate to 3.5%-3.75% by the end of the year. Traders are currently pricing in a rate of 4.48% by December 2024, according LSEG data.

Deutsche Bank expects two quarters of negative economic growth in the first half of 2024, which leads to a “pretty sharp rise” in the unemployment rate to 4.6% by the middle of next year from 3.9% now, said Brett Ryan, the bank’s senior U.S. economist, in an interview with Reuters.

“We see the economy hitting a soft patch in the first half of the year that results in a more aggressive cutting profile starting in mid year,” he said.

At the same time, the bank expects that the economic weakness “eases inflationary pressures,” Ryan said.

In the report released on Monday, the bank said it expected a “mild recession” in the first half of 2024.

DB expects an initial cut of 50 basis points at the Fed’s June 2024 meeting, followed by 125 bps of additional cuts over the rest of the year.

The U.S. economy so far has appeared to stave off predictions of a recession even as the Fed has hiked rates by 525 basis points since March 2022.

Indeed, Ryan said, “if things firm up again going forward, the Fed would be cutting by far less.”

  • Published On Nov 29, 2023 at 08:00 AM IST

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