JPMorgan Asset Management experts said that given the slowdown in the American economy, the Fed may lower interest rates more than it currently signals.
"Market participants expect a rate cut of about 1.5% in 2024, and this is a reasonable scenario. But if we see a sharp deterioration in economic conditions in the United States, the Fed may act more aggressively in terms of easing monetary policy," the experts added.
In recent months, there have been serious differences of opinion on how much the Fed is likely to cut rates this year. The Fed's latest forecasts, presented after the end of the December meeting, suggested a rate cut of 0.75% by the end of 2024, but current pricing indicates a rate cut of about 1.4%. Many investors prematurely predicted an end to the Fed tightening last year but that did not eventuate as the US economy proved more robust than anticipated. According to the CME FedWatch Tool, markets see a 67.1% probability of a 25 basis point rate cut at the Fed meeting in March 2024 and a 96.0% probability of a rate cut in May 2024.
"Given the progress we are seeing on a wide range of different inflation indicators, it seems much more likely the central banks can get back to target in 2024,” JPMorgan Asset said, adding that this year 10-year bond yields could fall by about 50 basis points from current levels as the Fed moves to ease monetary policy.
"Our baseline scenario for the U.S. economy still assumes a soft landing, but a recession cannot be completely ruled out, which is a good reason to own treasury bonds," the experts said.