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UBS Projects Fed Will be Forced to Cut Rates Three Times in 2023

Stock Markets Jun 16, 2022 06:06
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By Senad Karaahmetovic

UBS economist Jonathan Pingle reflected on Fed’s future actions after the central bank hiked the benchmark interest rate by 75 basis points yesterday.

The economist expects the Fed to deliver another 75 bp rate hike in July before going for 50 basis points in September. The central bank is likely to deliver an additional 175 bp of rate hikes this year, the economist told clients in a note.

As for 2023, Pingle expects the Fed to pause and then start delivering rate cuts to tackle slowing growth.

“We foresee the FOMC taking back some of the rate increases in late 2023, reducing the funds rate to be closer to the longer-run median in late 2023. Three 25 bp rate cuts, starting at the September 2023 meeting, would leave the target range for the federal funds rate at 2.50% to 2.75% at the end of 2023. Following the last 75 bp rate hike, in 1994, the FOMC was cutting rates less than a year later,” Pingle wrote.

UBS projects the Fed will announce the slowdown of balance sheet runoff in Q4 2023 with the start expected in Q1 2024.

All in all, Pingle sees a rising risk of a hard landing.

“As the FOMC pushes nominal rates higher, the headwinds mount, fiscal support falling away, higher prices eroding real income, and higher interest rates. Engineering an increase in the unemployment rate, as the one shown in the SEP projections, is much easier said than done,” he concluded.

UBS Projects Fed Will be Forced to Cut Rates Three Times in 2023
 

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