A group of strategists at UBS Bank stated that there is a “significant amount of uncertainty” surrounding the extent to which the Federal Reserve will cut interest rates in the current cycle. While the consensus among investors leans towards a soft landing, there is considerable ambiguity regarding the Federal Reserve’s actions in the future, especially in 2025.
Recent economic data, notably the slowdown in job growth, the continued decline in inflation, and the Federal Reserve reducing the likelihood of raising interest rates, have contributed to lowering overall risks in May, thus restoring investor confidence in a soft landing.
Currently, the market expects approximately a 1.5% reduction in federal interest rates before the end of the year, and UBS strategists indicate that “it is unlikely there will be more than two cuts.”
They added: “Price volatility should decrease if the interest rate on funds remains relatively stable at present, which would alleviate fluctuations in other asset classes. Looking ahead, UBS believes that at some point during the summer, the focus will shift to 2025, where a broader range of economic outcomes is possible compared to this year.
In particular, the uncertainty surrounding the extent of the Federal Reserve’s current policy tightening means there is significant uncertainty about how much the Federal Reserve will cut interest rates in this cycle. As a result, this summer’s market calm may be disrupted by differing views on what the Federal Reserve will do in the summer of 2025.
