Federal Reserve Rate Cutting Cycle

The Federal Reserve made a significant start to its rate-cutting cycle with a 50 basis point cut in September. However, UBS believes this is unlikely to be repeated, predicting a slower pace of cuts in 2024 as the economy shows resilience.

According to UBS economists, "We think the Fed will want to move more gradually next year, cutting rates by 25 basis points per quarter, rather than 50 basis points as previously expected."

Given a data-dependent Fed and recent economic surprises, UBS cautions that the possibility of pausing rate cuts this year shouldn’t be completely dismissed.

At the September meeting, the Fed's updated economic projections indicated that nine of the 19 participants anticipate less than 50 basis points of additional cuts in 2024. Some participants may even prefer to maintain current policy during the November meeting.

UBS has revised its outlook for rate cuts in 2025, now forecasting 100 basis points instead of the previously expected 200 basis points. This adjustment follows stronger-than-expected economic data and a resilient labor market.

Although wage growth has slowed since its peak in 2022, it remains stronger than at any point in the decade before the pandemic, according to UBS.

The overall economy is projected to continue growing, albeit with slower rate cuts than originally anticipated. "These data points suggest that the economy may be more resilient than previously thought, reducing the urgency for aggressive rate cuts," UBS concluded.