UBS strategists have issued a warning to traders that the market is pricing in too many rate cuts for the next year.
The Federal Open Market Committee (FOMC) voted unanimously to maintain interest rates within a target range of 5.25–5.5%. The decision aligns with market expectations and marks the third consecutive pause in the Fed's 525-basis-point hike cycle initiated in March 2022.
The Fed's updated economic projections indicate a median expectation of 75 basis points in rate cuts for the coming year, surpassing the earlier anticipation of a 50-basis-point reduction.
“Our view is that the market is pricing too fast a pace of cuts. We think the experience of this rate cycle is that it pays to listen to the Fed,” analysts at UBS Global Wealth Management stated.
“Our base case forecasts the Fed will refrain from further rate hikes and will start trimming rates by the middle of 2024, delivering 75bps in cuts by the end of next year.”
Markets were pricing in as many as 150bps in cuts for 2024, sending Treasury yields sharply lower. The market is now assigning a 69% probability that the Fed will start lowering rates in March next year.
“A lot of good news is already priced into equities,” the analysts remarked.