Fed’s Rate Cut Outlook

Investing.com — Recent comments from Fed speakers emphasize the need for gradual rate cuts amid mixed economic data, hinting that a pause might occur in one of the remaining Fed meetings this year. However, UBS warns that the major risk to rate cuts may emerge in Q1 2024.

Economists at UBS state that we might face a repeat of the inflation scare seen in Q1 2024, impacting the rates outlook. They predict 25 basis point rate cuts in the final two meetings of the year, adjusting the federal funds rate to a range of 4.25% to 4.5%.

Despite UBS's stance aligning with the Fed’s economic projections from September, strong economic data, particularly in retail sales and unemployment claims, has led some market participants to reconsider the likelihood of immediate rate cuts. This data has also made some Fed members cautious against substantial cuts.

Minneapolis Fed President Neel Kashkari noted that he anticipates a "modest pace" of rate cuts in the upcoming quarters. UBS economists highlight that the Fed aims to recalibrate rates to a neutral setting to uphold a strong labor market as inflation approaches the target.

The contrast between real rates and the perceived neutral rate supports expectations for further cuts. However, UBS indicates that the possibility of a 50 bps rate cut remains alive, contingent upon employment data trends. Another weak employment report could rekindle fears about downside risks, potentially prompting a larger rate decrease.