Market Analysis

Fed rate cuts helped the US economy approach toward a gentle landing, according to UBS

Amos Simanungkalit · 24 Sep13.1K Views

Image Credit: Reuters

UBS strategists continue to foresee a soft landing for the U.S. economy, emphasizing the importance of the Federal Reserve’s interest rate cuts in sustaining the ongoing economic expansion.

Recent economic growth has been solid, with a 3% increase in gross domestic product (GDP) in the second quarter and the Atlanta Fed’s current estimate for the third quarter tracking at 2.9%. However, UBS believes this is only part of the overall picture.

Analysts have observed that several business surveys are beginning to exhibit signs of weakening, and the Federal Reserve's Beige Book reflects a cooling economy. Additionally, the labor market appears to be softening, as indicated by a rising unemployment rate.

UBS also points out that the broad disinflation seen in the Consumer Price Index (CPI) data seems inconsistent with an economy growing at a 3% pace. They note, "Growth has primarily been driven by consumer spending, which remains robust despite only modest growth in disposable income—a trend unlikely to continue for long."

Despite these concerns, UBS's baseline scenario remains one of a soft landing, with anticipated rate cuts from the Fed expected to avert anything more severe than a mild slowdown.

Last week, the Fed implemented a 50 basis point interest rate cut, which was larger than typical after 14 months of maintaining steady rates. The Fed, previously focused on curbing inflation, is now balancing concerns regarding the labor market with inflationary pressures.

During his press conference, Fed Chair Powell stated that the recent cut does not signal any significant economic troubles and expressed a positive outlook on the overall conditions.

The Fed’s "dot plot" indicates the potential for an additional 50 basis points in cuts by the end of the year, along with another 100 basis points in 2025, in line with market expectations.

Powell emphasized that future decisions will rely on data and will be made on a meeting-by-meeting basis. In the event of a hard landing, the Fed is prepared to respond with more aggressive cuts.