UBS Strategists See Potential for Further Fed Rate Cut

UBS strategists believe there is room for the Federal Reserve to implement an additional 50 basis points (bps) rate cut later this year.

US stocks ended last week lower following a stronger-than-expected December jobs report that fueled concerns about the pace of interest rate cuts in 2025.
The S&P 500 fell 1.5% after the report revealed a net gain of 256,000 jobs last month, significantly exceeding the consensus forecast of 163,000. The unemployment rate dropped to 4.1%, down from 4.2% the previous month, matching its level in June.

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

This report follows other strong economic data earlier in the week. The JOLTS survey showed job openings rising to a six-month high, and the ISM survey indicated unexpectedly strong activity in the services sector. The ‘prices paid’ component of the ISM release reached its highest level since 2023, raising concerns about progress toward disinflation.

According to UBS strategists, the latest economic data “reinforces worries among top Fed officials that the task of returning US inflation to its 2% target is not yet complete, and there is no rush to cut rates further.” Minutes from the Fed’s final 2024 policy meeting echoed this sentiment, indicating “more work to do on inflation.” At that meeting, the median forecast for further easing in 2025 dropped to just 50 basis points, half of the previous projection.

The unexpectedly strong economic performance in 2024 shifted investor sentiment from fears of a recession to anticipating a soft landing, or ultimately, no landing at all. UBS strategists noted that this resilience appears to continue into 2025, but they expect growth to moderate, allowing progress toward the Fed’s inflation target to resume.

“As a result, we believe there will be scope for the Fed to ease policy by a further 50bps later in the year,” said strategists led by Mark Haefele.

Investors are awaiting more key economic and inflation updates this week, including the consumer price index (CPI), producer price index (PPI), retail sales, and industrial production reports set to be released in the coming days.