Investors Now Consider Fed Rate-Cut Outlook Overly Optimistic: UBS

Investors are now reconsidering the Federal Reserve’s forecast of a 200 basis point rate cut over the next two years, with many believing it to be overly optimistic. This shift in sentiment comes as stronger economic data alleviates recession fears, according to a recent report from UBS.

In a note released on Tuesday, UBS strategists observed that the market is now projecting fewer rate cuts compared to the Fed’s expectations, marking a notable change from just a few weeks prior. Recent economic indicators have exceeded forecasts, leading to a significant reduction in anticipated rate cuts. Currently, the market anticipates only 70 basis points in cuts for 2024, whereas the Fed has forecasted 100 basis points.

This move away from excessively dovish expectations has been fueled by the resilience of the U.S. economy, especially within the labor market. The jobs report for September revealed a robust increase of 245,000 jobs, far exceeding the expected 150,000, and the unemployment rate unexpectedly fell to 4.1%.

The ongoing strength in the labor market, combined with continuous inflationary pressures, has prompted investors to think the Fed’s own outlook of 200 basis points in rate cuts may be too optimistic, suggesting that rates could remain elevated for an extended period. UBS noted that the market has not only adjusted its expectations for the remainder of the year, but it has also revised the total cycle cuts downward from 220 basis points to 150 basis points, which is even below the Fed’s latest guidance of 200 basis points.