With Fed Easing Underway, What’s Next for Markets? UBS Shares Insights

The Federal Reserve’s recent decision to lower interest rates by 50 basis points signifies a bold policy shift, reflecting Chair Jerome Powell’s commitment to stay ahead of potential economic challenges.

This “hawkish 50” rate cut has offered some reassurance to investors, suggesting that the Fed is ready to take strong action if economic conditions begin to decline. Analysts at UBS view this move as a reactivation of the Fed’s protective stance, indicating that additional rate reductions could follow if key data, particularly in the labor market, starts to show weakness. While the markets have responded positively, attention now turns to the effectiveness of these cuts and their ability to facilitate a soft landing for the U.S. economy.

UBS anticipates a soft landing is probable, but ongoing investor confidence in prolonged economic growth will hinge on forthcoming data, especially labor market statistics such as the September payroll report.

In a broader context, UBS highlights that the current focus is on the terminal or neutral rate—specifically, how much further the Fed might reduce rates in this cycle. Although the scenario of a soft landing isn’t dependent on rates dropping to 3% or 3.5%, the outlook for the neutral rate raises significant questions about the economy’s trajectory in the post-pandemic era. UBS suggests that the notion of a “Roaring ’20s” period, characterized by stronger growth and inflation compared to pre-pandemic levels, presents an underestimated potential upswing.

At this moment, economic indicators remain robust, with growth projections for the third quarter hovering around 2.5% to 3%. UBS notes that investors are growing more comfortable with a macro landscape of preemptive rate cuts, steady disinflation, and moderate growth. Nonetheless, uncertainties linger, particularly regarding the long-term direction of the U.S. economy and the eventual neutral rate.

Powell characterized the rate cut as a “recalibration” aimed at making monetary policy less constrictive, suggesting that investors may also need to adjust their expectations for the terminal and neutral rate.

UBS adds that it is highly improbable the Fed will only implement a total reduction of 75 basis points in this cycle, with a 100 basis point cut this year appearing nearly inevitable. However, the outlook for 2025 remains uncertain, especially given potential changes in fiscal policy following upcoming elections.

In conclusion, while markets have factored in the possibility of a soft landing, volatility may rise as investors await clearer indications of whether this soft landing will lead to a more extended period of economic growth.