Big aggressive rate cuts coming within months say UBS, Morgan Stanley

investmentnews.com:

Strategists at UBS Investment Bank have made bold predictions regarding the US Federal Reserve’s future interest rate cuts, based on their expectations of an economic downturn.

UBS Investment Bank’s Arend Kapteyn and Bhanu Baweja have forecasted that the Federal Reserve will start on a substantial monetary policy easing cycle, cutting interest rates by a remarkable 275 basis points in the coming year. This projection is nearly four times more aggressive than what the markets are currently pricing. The strategists argue that a persistent decline in inflation will create favorable conditions for the central bank to initiate policy adjustments as early as March, with rate reductions expected to be substantial, mirroring a typical easing cycle.

Baweja highlighted the rationale behind their prediction, telling Bloomberg, “We don’t see the conditions for why this time is so different. Inflation is normalizing quickly, and by the time we get to March, the Fed will be looking at real rates which are very high.”

The strategists further anticipate that the benchmark federal funds rate will drop to a range between 2.5% and 2.75% by the end of 2024, with a terminal rate of 1.25% projected by early 2025. Their outlook is anchored in the belief that the US economy will slip into recession by the second quarter of the upcoming year.

In contrast to UBS’s bold prediction, money markets are currently pricing in a more conservative scenario, expecting the Federal Reserve to cut rates by only 75 basis points, with the process commencing in July.

To substantiate their forecasts, Kapteyn and Baweja point to historical easing cycles over the last three decades, where central banks in Group-of-10 countries (excluding Japan) typically lowered