The Fed will reduace rates in this cycle is greatly uncertail, as indicated by UBS



UBS strategists indicated a "high uncertainty" surrounding the extent of the Federal Reserve's interest rate reductions in the ongoing cycle. While market sentiment leans towards a soft landing, ambiguity persists regarding future Fed actions, particularly in 2025.


Perceptions among investors regarding the economic landscape are aligning, leading to reduced market volatility. Both the VIX index, measuring S&P 500 volatility, and the MOVE index for bond market volatility declined in late May to their lowest levels since before the Fed commenced raising rates in March 2022.


"These are indeed imperfect gauges to assess investor sentiment convergence," noted UBS strategists. "One might argue that low volatility is a better indicator of investor complacency rather than consensus on the macro outlook."


Recent economic data, notably decelerating job growth, ongoing disinflation, and the Fed's stance on rate hikes, have diminished macro risks in May, thus reinstating investor confidence in a soft landing.


A significant factor behind this consensus is the narrowing path for the Fed's interest rates this year, in alignment with the policy rates of other major central banks. Presently, the market anticipates approximately 1.5 Fed rate cuts before year-end.


Strategists emphasized, "It is highly unlikely to exceed two cuts, with the minimum being none, indicating a narrow range."


"Rate volatility should decrease if the interest rate remains relatively stable in the short term, which would mitigate volatility in other asset classes," they further explained.


Looking ahead, UBS foresees a shift in focus to 2025 during the summer, where a broader range of potential economic outcomes exists compared to the current year.


"In particular, uncertainty regarding how restrictive current Fed policy truly is implies heightened volatility over the extent of Fed rate cuts in this cycle," stated UBS. "Hence, market tranquility this summer may be disrupted by a divergence of opinions on the Fed's actions in the summer of 2025."