Citi Predicts 200 Basis Point Fed Rate Cuts by 2025, Boosting Energy Sector

Citi analysts anticipate the U.S. Federal Reserve will slash interest rates by a substantial 200 basis points across its next eight meetings, concluding in the summer of 2025.

This prediction stems from mounting evidence of a slowing economy and rising unemployment rates. The bank forecasts eight consecutive 25 basis point cuts, commencing in September and ultimately reducing the benchmark rate to 3.25%-3.5% by July 2025, a level expected to hold for the remainder of the year.

Dovish remarks by Fed Chair Jerome Powell have bolstered expectations for the initial rate cut in September.

Citi’s forecast is underpinned by recent indicators of a cooling economy. While U.S. real gross domestic product (GDP) grew at an annual rate of 1.4% in the first quarter of 2024, this represents a significant slowdown from the 3.4% growth observed in Q4 2023.

Meanwhile, the U.S. unemployment rate increased to 4.1% in June, approaching a reliable recession indicator. Despite historically low unemployment, economists are wary of the upward trend as a sign of weakening economic conditions. June saw a concerning decline in temporary services jobs, a pattern often associated with recessions.

Falling interest rates are projected to benefit the energy sector broadly. Studies have established a connection between interest rates and oil prices, with lower interest rates typically leading to increased borrowing and spending, which in turn drives up oil demand.

Source: Creative Commons
The evolution of interest rate uncertainty (VXTYN; left vertical axis) and the oil price volatility index (OVX; right vertical axis)

Additionally, falling interest rates can weaken the dollar, a trend that tends to boost commodity prices, including oil.

The renewable energy sector is likely to reap the greatest rewards from Fed rate cuts. Recent underperformance of renewable energy stocks relative to fossil fuel counterparts is expected to reverse as the cost of capital decreases and investor sentiment improves.

Lower interest rates can significantly reduce the financial burden on renewable energy projects, which often require substantial upfront capital for development.

The renewable energy sector is also poised to benefit from strong backing by the Biden administration. The Inflation Reduction Act (IRA), a landmark climate legislation, offers significant incentives for clean technologies and is expected to drive trillions of dollars in investments.

The IRA’s focus on boosting domestic clean energy production and reducing reliance on foreign imports aligns well with the expected boost from lower interest rates, creating a fertile ground for renewable energy growth.

The anticipated interest rate cuts by the Federal Reserve hold significant promise for the energy sector, particularly for renewable energy. Lowering the cost of capital and stimulating investment, combined with supportive government policies, are set to propel the growth of the renewable energy industry and accelerate the transition to a more sustainable energy future.

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