UBS has updated its predictions for when the Federal Reserve will start cutting interest rates, moving the expected timing from May to June. Consequently, the broker now projects a total reduction of 75 basis points (bps) in interest rates for 2024, a decrease from its earlier estimate of 100 bps.
“Given the upside surprises to both payrolls and inflation, we now expect the Fed to wait a bit longer before cutting rates, making its first 25 basis point cut in June rather than in May,” said analysts at UBS Chief Investment Office.
“Our base case calls for one rate cut per quarter after that until the Fed Funds target range reaches 3.25~3.5%, in line with our estimate of the longer-run neutral rate. However, we believe that a wide range of outcomes is possible,” they added.
The revision comes as UBS believes the Fed is in no rush to begin lowering interest rates given the US economy’s surprising resilience. In particular, the economy’s growth rates have exceeded the Fed’s long-term trend estimate of 1.8% since Q3 2022.
Analysts believe that a relaxed fiscal policy is significantly contributing to this trend, necessitating higher interest rates to temper economic activity.
Meanwhile, the payroll and inflation figures for January exceeded expectations, but UBS’s view on underlying trends remained unchanged.
“We believe that the actual underlying trend in job growth is more in line with how the data looked previous to the January report, and we expect more modest gains in the months ahead,” analysts at UBS wrote.
If labor and inflation metrics continue to exceed estimates, the Fed may find itself compelled to maintain its current policy stance indefinitely, the analysts added.
Conversely, should the economy experience a downturn, the central bank is likely to significantly reduce rates, as inflation would likely not pose a concern under those circumstances.