The US Federal Reserve (Fed) needs to cut interest rates to about 3% by the end of next year to ensure the economy lands softly, according to analysts at AlpineMacro.
The firm said in a note that even with the Fed's current stance, the US labor market is slowing and may no longer reach full employment, raising the possibility that inflation will fall short of the Fed's 2% target.
While the housing component has kept inflation above target, AlpineMacro notes that US inflation, excluding housing, has already fallen below 2%.
As housing prices slow and labor market slack increases, the firm explained that overall core inflation could fall below the Fed's target, further supporting the case for a rate cut.
AlpineMacro emphasized that if the Fed is slow to react, it could increase the likelihood of a recession, which would ultimately push rates lower, perhaps as low as 2%.
However, they now see a soft landing as the base scenario, with the 10-year Treasury yield expected to stabilize around 3.5% in that scenario.
"The Fed needs to cut rates to around 3% to ensure a soft landing," they wrote.
Additionally, AlpineMacro suggests that when the Fed cuts rates, the US dollar is likely to weaken, making the Japanese yen and British pound very attractive.
They also predicted that the Bank of Canada would be the next G10 central bank to cut interest rates, advising investors to maintain holdings in Canadian bonds.
AlpineMacro's analysis emphasizes the balance the Fed needs to strike to control the current economic landscape without causing a recession.
