Source: Wall Street News
Although UBS's benchmark forecast is that the Fed will cut interest rates twice this year, it now believes that if the expansion of the US economy remains elastic and inflation stagnates at 2.5% or higher, then the risk that the Fed will resume raising interest rates early next year will be very high. By the middle of next year, the federal funds rate may reach 6.5%.
UBS analysts Jonathan Pingle and Bhanu Baweja recently stated that although UBS's benchmark forecast is that the Federal Reserve will cut interest rates twice this year, they now believe that the possibility that inflation will not fall to the Fed's target is increasing. The strong US economy and stubborn inflation are increasing the possibility that the Fed will raise interest rates rather than cut interest rates, and the US may raise interest rates to 6.5% next year.
Specifically, if the expansion of the US economy remains elastic and inflation stagnates at 2.5% or higher, then there is a high risk that the Fed will resume raising interest rates early next year, and the federal funds rate may reach 6.5% by the middle of next year.
Investors are beginning to worry that the US economy may be overheating, UBS analysts said. If the Federal Reserve turns back to raising interest rates, UBS anticipates that it will trigger a sharp sell-off in the US bond market and stock market. Under the so-called “no-landing scenario,” more interest rate hikes will lead to a sharp flattening of the US Treasury yield curve, a sharp rise in benchmark bond yields, and the stock market may fall by 10%-15%. In the face of high inflation, it is expected that US government bonds will be sold off, credit spreads will also widen, and the valuation multiples will drop sharply.
Along with recent US data showing surprising resilience, the market has reduced its bets on the extent to which the Federal Reserve's policy is relaxed. After the better-than-expected US retail sales data for March came out on Monday, traders no longer thought they would cut interest rates by 100% before November this year.
UBS's report highlights that mainstream Wall Street banks are beginning to accept the possibility that the Fed's interest rate hike cycle is not over yet. Last week, along with the release of higher-than-expected US inflation data, Wall Street banks lowered their interest rate cut expectations one after another. Goldman Sachs expects the Federal Reserve to cut interest rates twice this year, while Barclays expects to cut interest rates only once. Bank of America and Deutsche Bank agree that the Federal Reserve will only cut interest rates once in December this year. Deutsche Bank further stated that if future inflation data continues to disappoint, or if the election results lead to fiscal policies that increase inflation, then the Federal Reserve will not cut interest rates this year or 2025.
editor/tolk