- According to UBS, the Federal Reserve will cut interest rates by a staggering 275 basis points in 2019.
- That’s about four times the steeper cut than what the market anticipates.
According to a leading European bank, the US economy will enter a recession in 2019, and the Federal Reserve will respond by sharply cutting interest rates.
According to the CME Group’s Fedwatch tool, UBS expects the Fed to cut rates by an astounding 275 basis points in response to declining inflation and a downturn in the economy. This is almost four times lower than the 75 basis points that the market is presently anticipating.
A group led by economist Arend Kapteyn and strategist Bhanu Baweja stated in a research note released that “one of the key features of UBS’s forecast is the very pronounced Fed easing cycle seen unfolding from March 2024 onwards,” adding that they anticipate rates to drop to just 1.25% in the first half of 2025.
According to UBS, the US recession in Q2-Q3 2024 and the continuous decline in headline and core inflation are the reasons behind the Fed’s planned rate reduction.
The Fed has raised borrowing costs from around zero to almost five percent since March 2022 to rein down skyrocketing prices. The inflation rate started to decline after reaching a four-decade high of 9.1% in June last year, but it is still far beyond the central bank’s 2% objective.
Although the US has so far escaped a recession, it would be expected that the tightening campaign would impact the economy. In the third quarter, the nation’s gross domestic product grew by 4.9%, marking the fastest growth rate in the previous two years.
In the meantime, despite the Fed’s interest rate hikes, the labor market has held up, and although the unemployment rate has increased recently, it is still below 4%.
The recession forecast provided by Kapteyn and Baweja conflicts with an alternative assessment made earlier this month by the head of asset allocation for the Americas at UBS.
During a presentation, Jason Draho stated that the US economy’s unexpected resiliency this year has created conditions for a “roaring ’20s” period characterized by higher interest rates, inflation, GDP growth, and bond yields.
