Fed’s subsequent fee lower to return in June, UBS says

Investing.com — UBS economists count on the Federal Reserve to ship the following rate of interest lower in June, by 25 foundation factors (bps), adopted by one other one in September.

The Fed slashed rates of interest by 25 bps at its newest FOMC assembly this month, aligning with market expectations. This marks the fourth lower since September, bringing the full discount to 100 foundation factors and putting the coverage goal vary at 4.25%-4.5%.

Nonetheless, the up to date dot plot introduced a extra hawkish stance than anticipated. The median projection now displays solely 50 foundation factors of cuts for 2025, a notable shift from the 100 foundation factors indicated within the September dot plot. The Fed’s outlook means that coverage changes might lengthen by way of 2027.

Markets reacted negatively to the announcement. Equities fell sharply, bond yields climbed, and the greenback strengthened.

Through the post-meeting press convention, Fed Chair Jerome Powell conveyed optimism concerning the state of the financial system and the outlook for 2025. Powell acknowledged that financial progress had surpassed the Fed’s latest expectations, whereas inflation stays above the two% goal. Because of this, the central financial institution intends to undertake a extra measured strategy to additional fee reductions.

“Our personal views on the financial outlook are much like the Fed’s, and we due to this fact have adjusted our fee lower forecast according to the brand new dot plot,” UBS senior economist Brian Rose mentioned in a be aware.

The financial institution now anticipates 25 foundation level cuts in each June and September, totaling 50 foundation factors for 2025, down from earlier expectations of quarterly cuts amounting to 100 foundation factors over the yr.

Whereas this extra cautious strategy is presently favored, Rose highlights that “a March fee lower might shortly be again on the desk if there may be unhealthy information from the labor market early subsequent yr.”

The Fed’s hawkish stance fueled a rally within the U.S. greenback, with the greenback index briefly surpassing 108. This pattern aligns with rate of interest actions over the previous two years and is predicted to persist into 2025.

Political elements, together with Donald Trump’s upcoming inauguration, are prone to preserve the greenback elevated within the close to time period. But, UBS highlights limits to additional greenback power, citing overvaluation, minimal expectations for U.S. financial easing in 2025, and the market’s deal with the constructive points of Trump’s insurance policies. Any deviation from these expectations might set off a greenback pullback.

UBS views present greenback rallies as promoting alternatives, forecasting EURUSD to return to 1.10 later in 2025.