The United States will enter a recession the following year, and the Federal Reserve will implement significant interest rate reduction, according to a leading European bank.
In November, UBS predicted that the Federal Reserve would cut interest rates by an astounding 275 basis points in response to declining inflation and an economic downturn – nearly four times the 75 basis point reduction that the market is currently anticipating, according to the CME Group’s Fedwatch tool.
“The extremely pronounced Fed easing cycle seen unfolding from March 2024 onwards is one of the key features of UBS’s forecast,” a team led by economist Arend Kapteyn and strategist Bhanu Baweja wrote in a research note published in mid-November. They also predicted that interest rates would fall to 1.25 percent in the first half of 2025.
“A response to the anticipated US recession in Q2-Q3 2024 and the ongoing slowdown in both headline and core inflation,” the Fed would reduce interest rates, according to UBS.
In an effort to rein in skyrocketing prices, the Fed has increased borrowing costs from near-zero to approximately 5.5% since March 2022. Inflation reached a four-decade high of 9.1% in June of last year before beginning to moderate; however, it remains significantly above the target of 2% set by the central bank.
It was anticipated that this tightening campaign would have a negative impact on the economy, but the United States has thus far averted a recession. The gross domestic product of the nation experienced its greatest growth rate in two years, reaching 4.9% in the third quarter.
In contrast, despite the Federal Reserve’s interest rate adjustments, the labor market has remained robust, as evidenced by the marginal increase in the unemployment rate over the past few months, which remains below 4%.
The recession forecast proposed by Kapteyn and Baweja seems to contradict an alternative perspective put forth by the director of asset allocation for the Americas at UBS.
