(Bloomberg) -- Evercore ISI’s Ed Hyman, one of Wall Street’s most closely watched and decorated economists, expects the Federal Reserve to cut interest rates by a half-point on Wednesday and to ultimately engineer a soft landing.
“If they don’t do 50 tomorrow I’ll be shocked,” Hyman, founder and chairman and the firm, said in an interview on Bloomberg Television.
When Hyman changes his tune on the economy, investors pay attention. For nearly a half-century, Hyman has ruled the Institutional Investor poll of investors in economics, achieving a No. 1 spot a whopping 43 times.
Hyman’s shift comes at a pivotal juncture for both the US economy and financial markets, with other economists checking their outlooks with inflation heading down toward the Fed’s 2% goal. The central bank is widely expected to reduce borrowing costs for the first time since the depths of the pandemic, with the S&P 500 Index trading a whisker away from an all-time high.
But the pivotal question is how much will the Fed cut? The market-implied odds that policymakers announce a 50-basis-point rate reduction were around 55% on Tuesday after retail sales data unexpectedly rose in August, up from almost no chance a week ago.
Hyman said he made a “very difficult decision” last week to lift his forecast for US gross domestic product to grow by 1% in the fourth quarter — an about-face from a 2% slump that the firm’s economic research team had previously forecast.
Why the flip? Hyman pointed to an array of factors including ebbing inflation that will support consumer incomes, the Fed’s upcoming rate cut and the continued growth of artificial intelligence, which he believes is poised to improve labor productivity. He now sees economic growth of 1% in the first and second quarters of 2025, before increasing to 2% in the third quarter and 3% in the fourth, as the affects of rate cuts kick in.
The primary risk to a soft landing is a weakening employment landscape. And recession risks remain if credit conditions tighten. Last week, Ally Financial Inc. sounded a warning bell on consumer credit metrics, while JPMorgan Chase & Co. dialed back expectations for next year’s net interest income at US banks.
Still, the consensus expectation is that economic growth will remain sturdy, with the Atlanta Fed’s GDPNow model projecting third-quarter real GDP growth climbing to a 2.5% annual rate, from a 3% pace in the second quarter.
“The economy is buzzing along,” Hyman said, arguing that if the Fed is mulling a half-point rate cut, it’s because “inflation really is coming down.”
--With assistance from Dani Burger and Matthew Miller.
©2024 Bloomberg L.P.
