Investors have been closely monitoring when the Federal Reserve will start cutting rates since the beginning of 2024. Initially, the possibility of a rate cut in March was on the table, but the focus shifted to June due to disappointing economic data. Now, it seems like the first cut might not happen until December, or possibly not at all this year. Despite this uncertainty, economists at UBS are still anticipating a cut in September.
According to analysts at UBS, the investment outlook is more dependent on the path and destination of rate cuts rather than the timing of the initial cut. They noted that the market has seen significant growth despite expectations for rate cuts dropping from seven to below two for 2024.
The debate over the pace, magnitude, and terminal level for rate cuts is expected to be a major focus this summer, as highlighted in UBS’s second-half outlook. While the consensus for the rest of 2024 is moderate GDP growth, low recession risk, and expectations of zero to two rate cuts, the outlook for 2025 and beyond remains uncertain.
The discussion on the rate path is crucial for the investment outlook for three main reasons, as outlined in the analysts’ note. Firstly, changes in market expectations for the neutral federal funds rate have closely mirrored fluctuations in the 10-year Treasury yield. Secondly, the debate over how restrictive current monetary policy is and the neutral federal funds rate remains significant, with differing opinions on the topic. Lastly, the lack of a clear framework from the Fed regarding the rate-cutting path could lead to market volatility as economic conditions evolve.
As uncertainties persist, large swings in rate cut expectations are likely, potentially adding to market volatility in the future.