Investing.com– The Federal Reserve is likely to cut interest rates in December before switching to a slower pace of cuts in 2025, UBS said in note, stating that U.S. economic growth was likely to remain strong.
UBS’ base case is for a 25 basis point cut in December, after which the Fed is expected to cut rates once per quarter in 2025. The central bank is expected to cut rates by a total 125 basis points by end-2025, bringing its target rate to 3.25% to 3.5%, which is what UBS expects to be neutral levels.
The brokerage noted that recent data showed the U.S. economy remained resilient, with growth underpinned by strong consumer spending and domestically-focused services. But manufacturing was under pressure from softer global demand, while the labor market was also on a “softening trend.”
“While we expect somewhat more moderate GDP growth in the quarters ahead, Fed rate cuts should help to keep the expansion going,” UBS analysts wrote in a note.
Recent signs of resilience in the U.S. economy sparked some doubts over whether the Fed will cut rates further in December, after a total 75 bps of cuts in its last two meetings.
Comments from Fed officials also showed some discord among policymakers over the pace of future rate cuts. The minutes of the Fed’s November meeting showed members in support of a gradual easing in interest rates, amid some concerns over sticky inflation.
UBS noted that while headline inflation showed signs of easing, core inflation remained sticky with housing remaining the biggest driver of inflation.
“One risk to the outlook is potential tariff increases, most of which we would expect to be passed along to consumers. However, we would expect tariffs to cause a one-time increase in the price level rather than triggering sustained higher inflation over the medium term,” UBS said.
UBS said the Fed was more likely to leave rates near 4% if inflation remained sticky.
On the U.S. policy front, UBS uncertainty was “unusually high” ahead of Trump’s inauguration on January 20.
While the Republicans did maintain a slim lead in both chambers of Congress, it still remained to be seen if they could pass the sweeping policy changes promised by Trump.