UBS Strategists on Federal Reserve Rate Cuts

UBS strategists suggest that the Federal Reserve has the opportunity to implement an additional 50 basis points (bps) rate cut later this year.

Last week, US stocks declined following a stronger-than-expected December jobs report, which raised concerns about the Federal Reserve’s timeline for interest rate cuts in 2025.

The S&P 500 dropped 1.5% after the employment data showed a net gain of 256,000 jobs last month, surpassing the consensus forecast of 163,000. The unemployment rate fell to 4.1%, down from 4.2% the previous month, matching June’s level.

In the bond market, the yield on the 10-year US Treasury rose by 10 basis points to 4.77%, marking the highest level since 2023.

This report follows other strong economic data earlier in the week. The JOLTS survey showed job openings reaching a six-month high, while the ISM survey highlighted unexpectedly robust activity in the services sector. Notably, the ‘prices paid’ component of the ISM increased to its highest point since 2023, raising concerns about progress toward disinflation.

UBS strategists noted that the recent economic data reinforces concerns among top Fed officials that achieving the US inflation target of 2% remains a challenge, indicating that there is no urgency to cut rates further. The minutes from the Fed’s last 2024 policy meeting supported this perspective, stating that there was “more work to do on inflation.” At that December meeting, the median forecast for further easing in 2025 was adjusted down to just 50 basis points, half of the previous projection.

The unexpectedly strong economic performance of the US has been a central theme in 2024. Investors have shifted their outlook from fearing a recession to anticipating a soft landing or no landing at all. UBS strategists observed that this economic resilience continues into 2025. However, they expect growth to moderate, which may help progress toward the Fed’s inflation target.

As a result, UBS strategists led by Mark Haefele believe there is room for the Fed to ease policy by a further 50 bps later this year.

Investors are looking forward to upcoming important economic and inflation updates, including the consumer price index (CPI), producer price index (PPI), retail sales, and industrial production reports set to be released in the days ahead.