Wall Street's "most dovish" investment bank UBS Group AG shifts: this year's interest rate cuts are in line with the Federal Reserve, dropping to 3.125% by 2025

After the Federal Reserve FOMC meeting, UBS Group AG tightened its previous "dovish" expectations.

On March 20, UBS Group AG released a report stating that it expects a reduced rate cut in the United States over the next two years. Specifically, UBS Group AG now expects the Fed to cut interest rates three times this year and further reduce by 150 basis points in 2025, ultimately bringing the interest rate level to 3.125%. In comparison, UBS Group AG previously expected rates to fall to 2.75% by the end of 2025 and to 1.25% in early 2026.

Recently, most Federal Reserve officials in their new forecasts anticipated three rate cuts this year, with policy rate expectations unchanged from last December. At the same time, the Fed raised its rate expectations for the following years, with the federal funds rate at 4.6% by the end of 2024, 3.9% by the end of 2025, and 3.1% by the end of 2026.

UBS Group AG pointed out that the main reason for adjusting their forecast is the impact of changes in the number of initial and continuing jobless claims. Despite possible data errors, current data still indicates a relatively stable labor market, with monthly job additions unlikely to fall below 100,000.

Regarding the labor market, UBS Group AG economists, including Jonathan Pringle, expect relative stability with a slowdown in labor market expansion but continued growth, and only a slight increase in the unemployment rate. One of the reasons for the improved labor market is the influx of immigrants, which not only brings new vitality to the labor market but also raises the economy's potential growth rate.

In the corporate sector, despite a 3.3% growth in the U.S. GDP in the fourth quarter, the performance of the corporate sector has been disappointing, showing signs of weakness. Factors include stagnant equipment investment (generally cautious business expansion), reduced intellectual property investment (affecting innovation and long-term competitiveness), declining manufacturing output (reduced demand or lower production efficiency), and subdued intentions for capital expenditure and hiring new employees (businesses not optimistic about future economic prospects).

Therefore, UBS Group AG warns that the current U.S. economic growth is overly reliant on consumer spending, and a reduction in consumer spending could pose risks to economic growth.

On household finances, although high-income households have a lot of cash on hand, overall, the savings rate is low. This may be beneficial in the short term as it could lead to increased consumption, stimulating economic growth. However, in the long run, a low savings rate could be concerning as it may mean people do not have enough reserves to cope during economic downturns.

UBS Group AG is also concerned that as the labor market slows down, increased interest payments due to rising rates, the resumption of student loan repayments deferred during the pandemic, and the cessation of pandemic-related unemployment benefit payments will reduce household funds and put pressure on families Despite the wage increases easing some of this pressure, UBS Group AG is still concerned that these pressures may lead more people into financial difficulties. Moreover, the rising default rates indicate that signs of pressure are spreading.

Brian Moynihan, CEO of Bank of America, also expressed concerns about American consumers this week, echoing the views of UBS Group AG