(Bloomberg) — There’s a stark divide among Wall Street banks over how aggressive they think the Federal Reserve will be in cutting interest rates next year.

On one side are UBS Group AG and Morgan Stanley, each of which anticipate deep interest-rate cuts in 2024 as inflation cools and the economy stalls. On the other is Goldman Sachs Group Inc., where analysts expect fewer reductions and a later start. 

The diverging opinions come after Treasuries were whipsawed in recent weeks, with traders seeking to make sense of the latest economic data even as looming debt sales fueled supply concerns. US bonds slumped sharply last month, driving yields to multi-year highs, only to rally in November after the Fed held rates steady and Chair Jerome Powell signaled the central bank’s tightening cycle may finally be over.   

UBS sees reductions starting as soon as March, working under the assumption that the US economy will slide into a recession from the second quarter. This in turn will prompt the central bank to cut rates in the large increments typical of an easing cycle — much more than what the Fed is currently projecting.

“We don’t see the conditions for why this time is so different,” said Bhanu Baweja chief strategist at UBS Investment Bank. “Inflation is normalizing quickly and by the time we get to March, the Fed will be looking at real rates which are very high.”

The UBS strategists forecast rates to fall to between 2.5% and 2.75% by the end of the year, with the so-called terminal rate plunging to 1.25% by early 2025.

Morgan Stanley also anticipates deeper cuts than the Fed. Researchers led by chief US economist Ellen Zentner see rate cuts starting in June 2024, then again in September and every meeting from the fourth quarter onward, each in 25-basis point increments, according to their 2024 outlook published on Sunday. That’ll take the policy rate down to 2.375% by the end of 2025, they said.

Goldman Sachs, meanwhile, sees the first 25-basis-point reduction in the fourth quarter of 2024, followed by one cut per quarter through mid-2026 — a total of 1.75 percentage points, with rates settling at a 3.5%-3.75% target range. That’s according to a 2024 outlook from economist David Mericle, also published Sunday. 

Here are the banks’ 2025 forecasts, compared with the median of Fed officials’ projections in September:

While UBS and Morgan Stanley forecast nearly four times more easing than markets — which currently price three-quaters of a point of rate cuts by the end of 2024 — Goldman Sachs’ forecasts are closest to market bets and the central bank’s outlook. 

Fed projections from September show two quarter-point cuts penciled in for next year and the policy rate ending 2025 at 3.9%, according to the median estimates of policymakers. Fed governors and regional bank presidents will update their forecasts at next month’s meeting.

Unlike UBS, Morgan Stanley’s team sees a weaker economy that warrants a greater magnitude of easing, though no recession. They expect unemployment to peak at 4.3% in 2025, compared with the Fed’s 4.1% estimate. Growth and inflation will be slower than officials anticipate, too.

“High rates for longer cause a persistent drag, more than offsetting the fiscal impulse and bringing growth sustainably below potential from 3Q24,” Zentner’s group said in their report. “We maintain our view that the Fed will achieve a soft landing, but weakening growth will keep recession fears alive.”

The team also expects the central bank to start phasing out quantitative tightening next September until it ends in early 2025. They see the Fed reducing the runoff caps on Treasuries by $10 billion per month and continuing to reinvest mortgages into Treasuries.

Goldman Sachs expects the Fed to keep rates relatively high because of a higher equilibrium rate, as “post-financial crisis headwinds are behind us” and bigger budget deficits are likely to persist and boost demand.

“Our forecast could be thought of as a compromise between Fed officials who see little reason to keep the funds rate high once the inflation problem is solved and those who see little reason to stimulate an already-strong economy,” Goldman’s Mericle wrote.