The UBS strategists have expressed optimism about the potential rate cuts by the Federal Reserve and their impact on the U.S. economy.
Recent economic indicators, particularly in the labor market, have shown unexpected resilience with robust payroll and wage growth and a decrease in the unemployment rate.
Although wage growth has moderated since its peak in 2022, it remains elevated compared to pre-pandemic levels.
However, business and consumer surveys indicate a decline in sentiment, creating a complex economic landscape.
The UBS strategists believe that the rate cuts will support economic growth and expect it to maintain a healthy pace in the coming quarters.
They also anticipate a gradual decline in inflation rates.
The Federal Reserve aims for a 2% target for personal consumption expenditures (PCE), with core PCE (excluding food and energy) serving as a more reliable gauge of underlying inflation trends.
Recent data shows a slowdown in PCE inflation, aided by falling gasoline prices.
UBS strategists caution that inflation may remain slightly above the Fed's 2% target in the medium term, with the housing market being a significant contributor.
However, recent data suggests a reversal in this trend, which could help mitigate headline inflation in the future.
They also highlight potential long-term benefits from productivity gains associated with artificial intelligence, which could contribute to lower inflation rates over time.
The Federal Reserve initiated its rate-cutting cycle with a larger-than-expected 50 basis point cut in September due to emerging downside risks to the labor market.
However, stronger-than-expected economic data has made another substantial cut less likely.
UBS predicts a 25 basis point cut in the remaining meetings of the year, followed by a more gradual approach in 2025, with cuts occurring once per quarter.
However, there is a risk that the Fed may choose not to proceed with any cuts this year, as indicated by the September dot plot.
Current market forecasts suggest approximately 1.7 rate cuts by December, with a 30% probability of no cuts this year.
UBS believes that even if the Fed decides against a cut in the near term, it would not significantly alter the overall trajectory of monetary policy, which is expected to move towards a neutral stance by 2025.
Recent public comments from Fed officials indicate a growing sentiment that maintaining the current policy may be appropriate at the upcoming November meeting.
The interplay between wage growth, inflation, and Federal Reserve policy will be crucial in shaping the outlook for the U.S. economy.
The anticipated rate cuts are seen as a mechanism to support growth, despite challenges in consumer and business sentiment.
Investors and policymakers will closely monitor developments in the labor market and inflation dynamics as they navigate the complexities of the current economic environment.