The boldest investment bank! UBS predicts that the Federal Reserve will "cut interest rates by 275 basis points" next year, four times the market consensus.

As of now, no investment bank has been bolder than UBS in predicting the future path of interest rates by the Federal Reserve.

In their latest research report, UBS strategists Arend Kapteyn and Bhanu Baweja pointed out that "persistent inflation decline will lead the Federal Reserve to start easing policies as early as March next year, and interest rates may decrease significantly in line with a typical easing cycle, up to 275 basis points, nearly four times the market pricing."

Baweja, in an interview with the media at UBS's London office, stated that "inflation is rapidly normalizing, and by March, the Federal Reserve will be concerned about very high real interest rates."

The two strategists predict that by the end of 2024, the benchmark federal funds rate will drop to 2.5%-2.75%, and by early 2025, the terminal rate will drop to 1.25%. Their views are based on the expectation that the US economy will enter a recession in the second quarter of next year.

In contrast, the money market expects the Federal Reserve to start cutting interest rates from July next year, with a magnitude of only 75 basis points.

To support their predictions, Kapteyn and Baweja pointed out that during the past 30 years of easing cycles, G10 central banks (excluding Japan) typically cut interest rates by an average of 320 basis points within 15 months.

"We believe that we will see a normal easing cycle," Kapteyn said. "Except for Japan, the degree of easing by each central bank will far exceed market pricing."

Currently, Wall Street banks still have divergent views on the prospects of policy easing. Morgan Stanley believes that the Federal Reserve will cut interest rates significantly within two years, while Goldman Sachs believes that it will cut interest rates slightly later.

It is worth mentioning that although the expectation of interest rate cuts by the Federal Reserve may weaken the US dollar and lower US bond yields, Baweja still predicts that due to the relatively high issuance of US bonds, interest rates will bottom out at 3.5% next year.

He said, "In a cycle of aggressively cutting interest rates by 275 basis points, we believe that the yield on 10-year US bonds will only decrease by about 100 basis points."

In addition, UBS has a unique view on the monetary policy of the eurozone, expecting the eurozone to barely avoid a recession, which will prompt the European Central Bank to delay its easing policies.

Baweja and Kapteyn predict that "the European Central Bank will start an interest rate cutting cycle from June, with a magnitude of only 75 basis points. On the other hand, the money market expects the European Central Bank to start cutting interest rates as early as April, with a magnitude of 100 basis points."