The Fed will lower interest rates under 3% as a mild recession leads to a 'soggy 2024,' UBS chief economist says

• The Fed will cut interest rates below 3% by next December, UBS chief US economist Jonathan Pingle said.
• Cuts will start in March and accelerate in the second half of the year, he told CNBC on Friday.
• "We think we're going to end up with a relatively soggy 2024 when we look back at the end of next year."

The Federal Reserve will likely bring interest rates below 3% by next December, as a pullback in consumer spending will trigger a mild recession in 2024, UBS chief US economist Jonathan Pingle told CNBC on Friday.

This would imply more than 225 basis points in cuts, representing a much deeper Fed pivot than many on Wall Street expect, with markets pricing in about 150-175 points by the end of 2024.

It also goes well beyond the central bank's own projections of 75 basis points in cuts next year, which would lower the fed funds rate to 4.50%-4.75% from 5.25%-5.50% now.

Pingle expects the Fed's easing cycle to start with a quarter-point cut in March, followed by similar cuts in May and June to keep pace with cooling inflation.

"We see the economy slowing and then the Fed picking up the pace in the second half of the year, taking rates below 3% at the December meeting," he predicted.

By the middle of 2024, Pingle sees the economy slowing, sending the inflation rate close to the Fed's 2% target and allowing central bankers to ease more rapidly to "prevent worst-case economic scenarios from unfolding."

Still, his baseline outlook assumes a mild recession, largely due to consumer spending finally losing momentum, he explained.

Through 2023, consumers drove economic resiliency due to wealth effects, high savings, and help from household re-leveraging. While fiscal support also boosted balance sheets, these forces will provide less support deeper into 2024, he added.

This will lead to a broader growth decline, as industrial sectors won't see much expansion without help from consumer spending.

"We think we're going to end up with a relatively soggy 2024 when we look back at the end of next year," Pingle said.