Despite the hawkish tone in the latest Federal Open Market Committee (FOMC) minutes, UBS analysts remain confident that the Federal Reserve will cut rates in 2024.
The minutes revealed that several Fed officials were open to further rate hikes if inflation risks materialize. This stance was more hawkish than Fed Chair Jerome Powell’s remarks after the meeting on May 1, where he downplayed the need for additional hikes.
UBS also notes that recent economic data, including stronger-than-expected labor market figures and US Treasury yield increases, have fueled concerns that the Fed might keep rates high for longer.
However, the bank highlights that these minutes predate the April Consumer Price Index (CPI) release, which showed a slowdown in inflation.
They state that the Fed has maintained a patient, data-dependent approach, aiming to ensure inflation trends sustainably toward the 2% target. UBS believes that while rate hikes are not entirely off the table, the prevailing expectation among Fed officials is that inflation will decline over the medium term.
UBS foresees the Fed loosening financial conditions in 2024, projecting cumulative rate cuts of 50 basis points by year-end. They argue that the latest data points to a resumption of disinflation and a decelerating US economy, moving towards a soft landing. Therefore, despite the recent hawkish rhetoric, UBS believes the Fed is still likely to cut rates.