UBS Sees Path to Fed Rate Cuts Despite Leadership Uncertainty
Despite ongoing uncertainty around leadership changes at the Federal Reserve, UBS expects the central bank to proceed with interest rate cuts later this year. The outlook is supported by easing inflation pressures and signs of softening in the labor market.
Kevin Warsh Signals Policy Independence
Kevin Warsh, nominated by Donald Trump to succeed Jerome Powell, appeared before the Senate Banking Committee and emphasized his independence from political influence.
Warsh rejected claims that he would act in alignment with the White House and instead called for significant changes within the Fed. These include revising the inflation framework and encouraging more internal debate among policymakers. He also suggested reconsidering the practice of holding press conferences after every FOMC meeting, stressing that meaningful communication should take priority over routine repetition.
Cooling Inflation Supports Easing Outlook
According to UBS, recent inflation data indicates that price pressures are moderating faster than expected. March figures showed underlying inflation coming in softer than market forecasts.
The bank expects that declining core inflation, combined with diminishing tariff-related effects, could create favorable conditions for the Fed to begin cutting interest rates in the coming months.
Labor Market Weakness Adds to Rate Cut Case
Signs of slowing momentum in the labor market further strengthen the case for policy easing. UBS highlighted a decline in average weekly working hours and slower wage growth as indicators of weakening demand.
The firm also warned that a continued drop in labor demand could lead to a sharper increase in unemployment, reinforcing the need for monetary support.
Fed Policy Outlook May Be Too Hawkish
UBS believes financial markets may be overestimating how restrictive future Fed policy will be. The firm noted that the composition of the Fed board could shift toward a more dovish stance later this year, with many policymakers favoring a policy rate closer to 3%.
Rate Cuts Could Support Markets
UBS maintains its forecast for an additional 50 basis points of rate cuts by the end of the year. According to the bank, further monetary easing could provide support for equities and high-quality bonds over the medium term.
