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UBS: The Fed will cut in September

Published 06/25/2024, 03:54 AM
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UBS economists on Monday reaffirmed their outlook for a soft landing for the US economy, expecting the Federal Reserve to begin cutting interest rates in September.

While there has been unusual volatility in economic data since the start of the pandemic, certain trends now appear to be well established, UBS noted.

The labor market, which was severely overheated two years ago, has returned to near pre-pandemic conditions, supported by a strong increase in labor supply.

Moreover, retail sales and inflation are also showing signs of moderation. In May, core CPI, which excludes food and energy prices, rose by just 0.16% month-over-month, marking the smallest increase since August 2021.

Although the year-over-year core inflation rate is trending lower, it remains considerably above its pre-pandemic levels.

“​​Shelter inflation in particular has remained stickier than we expected, but we still view a slowdown in the months ahead as inevitable given more timely information on new rental leases,” economists wrote.

In terms of monetary policy, the Fed kept the rates unchanged at its June meeting, aligning with market expectations.

The median projection now indicates only one 25 basis point rate cut by year-end, down from three in March, implying a potential hold until December. Still, the Fed's economic projections remain robust compared to expectations, economists pointed out, supporting a delayed start to rate cuts.

“We maintain our base case that the Fed will be in a position to cut rates in September as it receives softer data on growth, the labor market, and inflation,” they said. “We see risks as skewed toward the Fed staying on hold for longer than in our base case, but we still see additional rate hikes as unlikely.”

In line with these trends, the US economy seems to be on track for a soft landing, UBS remarked, with downside risks being mitigated by the option for the Fed to cut rates aggressively if necessary.

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