UBS economists have projected that the Federal Reserve will implement its next interest rate cut in June, followed by another cut in September.
The Fed recently lowered rates by 25 bps at its latest Federal Open Market Committee (FOMC) meeting, bringing the total cuts to 100 bps. The updated dot plot released during the meeting indicates a more hawkish outlook than previously expected, with the median projection suggesting only 50 bps of cuts for 2025. This has led to a negative reaction in the markets, with equities falling, bond yields rising, and the U.S. dollar strengthening.
Fed Chair Jerome Powell expressed optimism regarding the economy's performance and the outlook for 2025, prompting the central bank to adopt a more cautious approach to future rate reductions. The market's response to the Fed's announcement was immediate and pronounced, with equities falling sharply, bond yields climbing, and the dollar rallying. UBS has revised its rate cut forecast, now anticipating 25 bps cuts in both June and September.
The Fed's hawkish stance has contributed to a rally in the U.S. dollar, which is expected to remain elevated in the near term. Political factors, particularly the upcoming inauguration of Donald Trump, are likely to play a role in sustaining this dollar strength. However, UBS has highlighted potential limits to further dollar appreciation, citing concerns over overvaluation and minimal expectations for U.S. monetary easing in 2025.