As you might’ve heard, there’s considerable disagreement across major banks regarding the likely trajectory of the Fed funds rate in 2024.

UBS made waves early this week by projecting aggressive rate cuts which the bank’s economists believe will be necessary to combat rising unemployment and a sharp deceleration in growth.

On the other end of the spectrum is Goldman, whose strategists and economists expect just one lonely rate cut next year and not until Q4.

Note from the figure that Goldman sees a 3.75% neutral rate. That’s markedly higher than last cycle. As Goldman explained, “the post financial crisis headwinds are behind us, much larger fiscal deficits that boost aggregate demand are likely to persist, the funds rate is approaching equilibrium from above rather than below and the r-star narrative is changing.”

To be sure, the bank does see some scope for insurance cuts in certain downside scenarios. Importantly, the logic for expecting such cuts may actually be the opposite of what might seem intuitive to some market participants.

The standard narrative says a shell-shocked Fed suffering from PTSD after watching inflation spiral to quadruple target will be reluctant to cut rates even if growth decelerates and/or unemployment rises. But, as Goldman alluded to, the fact that the Fed was forced to raise rates further and (much) faster than they probably would’ve liked could mean the Committee will be even more inclined to cut at the first sign of trouble, particularly given how much countercyclical breathing room they reclaimed over just 16 months of rate hikes.

“The FOMC undertook two dovish pivots last cycle in response to growth scares that did not look like serious recession threats to us, and if the bar for responding was low last cycle, it will likely be even lower starting from a higher funds rate of 5.25-5.5%,” Goldman remarked.

But, again, that’s not the bank’s base case. As noted above, Goldman isn’t in the dove camp with respect to the likely evolution of US monetary policy. As usual, the bank provided a probability-weighted average (figure on the right below) using their four scenarios (on the left).

That average is meaningfully below the baseline, but still more hawkish than market pricing.

“Our [baseline] forecast could be thought of as a compromise between Fed officials who see little reason to keep the funds rate high once the inflation problem is solved and those who see little reason to stimulate an already-strong economy,” David Mericle said.