US Economy on Track for Soft Landing with Support from Fed Rate Cuts: UBS

UBS strategists are maintaining their forecast for a soft landing for the U.S. economy, attributing a significant role to the Federal Reserve’s rate cuts in sustaining the current economic expansion.

Recent economic growth has been strong, with the gross domestic product (GDP) experiencing a 3% increase in the second quarter. The Atlanta Fed’s estimate for the third quarter is currently at 2.9%. However, UBS emphasizes that this is only part of the broader economic picture.

Analysts have noted that various business surveys are now indicating signs of weakening, and the Federal Reserve’s Beige Book points to a cooling economy. Additionally, the job market is showing signs of softening, as indicated by a rising unemployment rate.

UBS highlights that the widespread disinflation reflected in consumer price index (CPI) data appears inconsistent with an economy that is expanding at a 3% rate.

“Growth has been primarily driven by consumer spending, which remains resilient despite only modest growth in disposable income. This trend is unlikely to continue,” UBS strategists suggest.

Despite these concerns, UBS’s base case remains a soft landing. They expect that rate cuts from the Federal Reserve will help avoid “anything worse than a mild slowdown.”

Recently, the Fed reduced interest rates by 50 basis points, marking a significant cut after holding rates steady for 14 months.

Previously focused on controlling inflation, the Fed is now navigating between risks in the labor market and inflationary pressures.

During his recent press conference, Fed Chair Powell stressed that this cut does not signal any serious economic problems and expressed a positive outlook on the overall conditions.

The Fed’s projections indicate the possibility of another 50 basis points reduction by the end of the year, along with an additional 100 basis points in cuts anticipated for 2025.

Powell reaffirmed that future decisions will be based on data and made on a meeting-by-meeting basis. In the case of a hard landing, the Fed stands ready to respond with more aggressive rate cuts.