UBS: Data should allow the Fed to start cutting rates later this year

UBS analysts see growing evidence that the Federal Reserve will cut rates later in 2024.

The bank’s note highlights a recent decline in inflation, with the core PCE price index showing its slowest monthly increase this year. This follows a similar trend in the Consumer Price Index (CPI).

Slower consumer spending is also contributing to the easing of inflation. Real consumption growth has been revised downward, indicating a moderation in spending that helps reduce price pressures.

UBS also points to other signs of cooling economic activity, including revised GDP growth figures and sluggish durable goods orders. A rise in continuing jobless claims further suggests a softening labor market.

According to the bank, the Federal Reserve’s data-dependent approach means upcoming economic data, particularly the June jobs report, will be crucial. While Fed officials acknowledge the ongoing fight against inflation, they also recognize the lagged effects of previous rate hikes.

UBS believes this paves the way for rate cuts later in the year, with the economic data likely prompting the Fed to act. The analysts anticipate the market will price in further cuts for 2025, leading to lower bond yields by year-end. They forecast a of 3.85%.

In this environment, UBS sees diversified fixed income strategies as attractive. They recommend a core holding in quality bonds alongside investments in higher-yielding areas of the bond market to capitalize on the potential for lower rates and moderate economic growth.