Investing.com — Fed speakers have been echoing the need for gradual rate cuts recently amid a string of noisy data, fueling expectations that a pause could be on the table in one of the two remaining Fed meetings for this year, but UBS believes the big risk to the rate cut path is likely to come in the first quarter.
“The big risk to the rates outlook we expect comes in Q1, and whether or not we repeat the inflation scare of Q1 2024,” economists at UBS said in a note on Friday.
UBS maintains its forecast for 25 basis point rate cuts at each of the two remaining meetings through year-end, bringing the federal funds rate to a range of 4.25% to 4.5%.
While the economists’ rate cut call is line with the Fed’s summary of economic projection, released at the September meeting, recent strong economic data, including retail sales and unemployment claims, “have led some market participants to question the likelihood of near-term rate cuts,” UBS said.
The data have also encouraged some Fed members to err on the side of the caution when it comes to backing jumbo cuts.
Minneapolis Fed President Neel Kashkari said on Monday that he continues expect a “modest pace” of rate cuts over the next few quarters.
The Fed’s primary focus, the economists suggested, is on “moving rates back to a more neutral setting to maintain a robust labor market as inflation returns to target.”
The distance between the level of real rates and the mainstream views of where the neutral rate – one that neither supports nor curbs economic growth – also side with expectations for further cuts, UBS said.
The path toward another 50 bps rate cut, however, isn’t dead and buried following the strength of recent economic data, the economists suggest, as another soft employment print could stoke bets on another jumbo cut.
“While the FOMC may pause at some point, another soft employment report at some point could reignite concerns over downside risks, prompting another 50 bp reduction in the target range,” UBS added.