According to UBS, the Federal Reserve is expected to make significant interest rate cuts next year. UBS predicts that the central bank will slash rates by 275 basis points, which is almost four times more than what the market is currently expecting. This move is anticipated to be a response to a projected recession in mid-2024 and a decline in inflation.
UBS economists Arend Kapteyn and strategist Bhanu Baweja stated in a research note that they foresee a “very pronounced Fed easing cycle” starting in March 2024. They expect rates to plummet to just 1.25% in the first half of 2025.
Since March 2022, the Federal Reserve has been gradually increasing borrowing costs to combat rising prices. However, inflation has started to cool down, although it remains above the central bank’s 2% target. Despite this tightening campaign, the US has managed to avoid a recession so far, with the economy expanding by 4.9% in the third quarter, the highest growth rate in two years. The job market has also remained strong, with the unemployment rate staying below 4%.
Interestingly, UBS’s recession prediction contradicts a separate outlook from the bank’s head of asset allocation for the Americas, Jason Draho. In his presentation, Draho suggested that the US economy’s resilience this year could lead to a period of higher GDP growth, inflation, bond yields, and interest rates, reminiscent of the “roaring ’20s”.
It will be interesting to see how the Federal Reserve responds to the economic landscape in the coming months and whether their actions align with UBS’s forecast.
