After bold start to rate-cutting cycle, Fed to downshift pace of cuts in 2025: UBS

Investing.com — The Federal Reserve made a bold start to its rate cutting cycle with a jumbo 50 basis point rate cut in September, but UBS believes this is unlikely to be repeated and the Fed will downshift to a much slower pace of cuts next year as the economy continues to flex its muscles. 

“We think the Fed will want to move more gradually next year, cutting rates by 25bp per quarter, rather than 50bp per quarter as we had previously expected,” economists at UBS said in a note on Monday.

Against the backdrop of a data dependent Fed and a string of economic data surprises, the economists cautioned that the risk of pausing the rate cutting cycle this year can’t be completely ruled out. 

At the September meeting, the Fed’s updated summary of economic projections, or so-called dot plots, “showed nine of the 19 participants looking for less than 50bps of additional cuts in 2024, and recent public comments suggest to us that some participants believe it will be appropriate to leave policy unchanged at the November meeting,” the economists said.

The economists at UBS now see a total of 100 basis points of rate cuts in 2025, down from its previous expectation of 200 basis points.

The less dovish view comes in the wake of stronger-than-expected economic data and a resilient labor market.

“Wage growth has slowed since the peak in 2022, but it is still stronger than at any point in the decade before the pandemic,” UBS said.

The overall economy will continue to churn out growth in the quarters ahead, the economists suggest, as rate cuts, albeit now expected at a slower pace.

“These data points suggest that the economy may be more resilient than previously thought, reducing the urgency for aggressive rate cuts,” UBS said.