Despite the uncertainty that has accompanied the leadership transition at the U.S. central bank, UBS remains of the view that the Federal Reserve is likely to ease policy later this year. The bank cites recent inflation readings and signs of softness in the labour market as reasons the central bank could move toward cutting rates.
Kevin Warsh, President Trump's nominee to succeed Fed Chair Jerome Powell when his term expires next month, appeared before the Senate Banking Committee on Tuesday. During his testimony he emphasized that he would preserve monetary policy independence and pushed back on suggestions he would serve as a White House proxy. Warsh also urged what he described as a "regime change" at the Fed - advocating a new inflation framework and greater internal debate. He said he may not hold a press conference after every Federal Open Market Committee meeting, asserting that "truth-seeking is more important than repetition."
UBS highlighted the latest price data for March as evidence that underlying inflation has been milder than investors and markets had expected. The bank's analysis states that "cooling sequential core inflation in the coming months amid fading tariff effects should open the door to further rate cuts by the US central bank."
Labour market indicators bolster the case for easier policy, UBS added. The firm pointed to lower average weekly hours and decelerating wage growth as signals of demand-side weakness in the labour market, and warned that a further decline in labour demand could drive the unemployment rate sharply higher.
UBS also commented on how Fed board composition could influence policy. "With the composition of the Fed board likely to become more dovish later this year, and a large majority of policymakers still favoring returning the policy rate closer to 3%, we believe the current market pricing of Fed policy is too hawkish," the firm said.
Maintaining its forecast, UBS expects an additional 50 basis points of rate cuts toward year-end. The firm added that "further easing should support equities and high-quality bonds over the medium term."
Context and implications
The combination of cooler-than-expected core inflation readings and initial signs of labour-market softening form the basis for UBS's view that the Fed can move to ease policy later in the year. Market expectations for policy moves, in UBS's assessment, currently understate the likelihood of such cuts given the expected change in the board's composition and a prevailing policymaker preference for lower rates around 3%.
How these dynamics play out will be important for equity markets and high-quality bonds, which UBS specifically singled out as likely beneficiaries of further easing over the medium term.