The Tell: Investors won’t see relief until 2024 in the form of Fed rate cuts, warns Credit Suisse


Global central banks already managed to “pop some of the pandemic-inspired bubbles” this year by tightening monetary policy, but investors may need to wait until 2024 for relief in the form of Federal Reserve interest rate cuts, say Credit Suisse economists.

The Swiss bank’s economics team pointed to housing, cryptocurrencies, special-purpose acquisition companies (SPACs), or “blank-check” companies, as some of the areas where frothy conditions have already fizzled, but also warned investors that “much more probably needs to be done to make monetary conditions properly tight,” in their 2023 outlook.

U.S. home prices shot up 40% during the pandemic, but have sputtered as the 30-year fixed mortgage rate has doubled this year, even briefly topping 7% in November, the highest in 20 years.

Related: Mortgage bonds are cheap but ‘no one is buying,’ says BofA Global

Home prices also have fallen in some high-price West Coast markets, likely worrying households who bought at peak prices. But there’s also been nothing short of carnage this year in cryptocurrencies, even before November’s stunning implosion of FTX, once one of the world’s largest crypto exchanges.

The world’s largest digital coin, bitcoin BTCUSD, -0.24%, was down more than 60% on the year through Friday, according to CoinDesk. That compares with the S&P 500 index’s SPX, -0.12% near 17% tumble in the same stretch, the Dow Jones Industrial Average’s DJIA, -0.29% decline of about 7% and the Nasdaq Composite Index’s COMP, -0.01% skid of roughly 29%, according to FactSet.

Investors expect the Fed to raise its policy interest rate by 50 basis points next week, or by less than its hikes of 75 basis points at its past four rate-setting meetings. Although, there’s still considerable debate about how high, for how long, the Fed will need to go to substantially cool inflation, or if it could go too far and wreck the U.S economy.

In addition to housing and crypto, pain in SPACs has continued, with KKR Acquisition Holding KAHC, +0.02% this week becoming the latest to liquidate.

Even so, Credit Suisse economists worry global risk appetite still remains too optimistic, despite slowing U.S. growth and the threat of recession for major world economies.

While a U.S. recession “isn’t a foregone conclusion,” Ray Farris’ team at the Swiss bank wrote on Thursday that Fed rate cuts look unlikely in 2023, in part because America’s “structurally tighter labor markets are likely to cause inflation to be slower to moderate than in the pre-pandemic decades.”

“Markets appear to remain conditioned by the pre-pandemic Fed ‘puts’ of Greenspan, Bernanke, Yellen, and even Powell (in 2019) to expect the Fed to respond rapidly to weaker growth with cuts in the second half of next year,” the Farris team wrote. “We disagree.”

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