• JPMorgan Asset Management's Bob Michele said the Fed could slash rates by 250 basis points in 2024.
  • Cuts of that magnitude could send the benchmark rate below 3%.
  • That's as a falling inflation rate makes the current federal funds rate more restrictive.

There's a good chance that the Federal Reserve will slash interest rates by as much as 250 basis points through 2024, JPMorgan Asset Management's Bob Michele told Financial Times last Thursday.

If the inflation rate is falling while the fed funds rate holds steady, that progressively tightens the real rate, meaning restrictive policy gradually becomes more of an economic burden. 

"I tip my hat to the Fed. They have engineered a soft landing. You're pretty much bang on the 2% inflation target. You've got unemployment at 4% or below for 24 consecutive months. They've met their dual mandate of full employment and price stability," Michele, who is the head of global fixed income, said. "I just think soft landings are notoriously difficult to maintain, and their best hope of ensuring that we stay in a soft landing is if they gradually start bringing down the fed funds rate; otherwise real rates will be too powerful a headwind."

With the benchmark rate unchanged at 5.25%-5.5% since July, a 250-basis point slash would bring it down to a 2.75%-3% range. That's in line with the Fed's projected neutral rate of 2.5%, he said, making it an appropriate adjustment.

Still, the Fed will have to carefully consider its approach, as a premature policy pivot could re-accelerate inflation in the soft-landing scenario, Michele added. 

"Looking at these tail risks, higher inflation is the one that is more problematic for markets. Businesses and households just absorb the high-rate environment, and suddenly you see home sales start to pick up again, auto sales pick up and businesses invest, and that creates a higher level of inflation," he said.

His comments came ahead of the release of December's jobs report on Friday, which showed the labor market was considerably hotter-than-expected. Some argue that will push back on any soon-to-come Fed pivot this year, and could even necessitate a rate hike.

UBS has also said the Fed could bring interest rates below the 3% threshold, though it expects a mild recession in mid-2024 as consumers slowly lose momentum.