UBS expects the Federal Reserve to cut rates by a further 75 basis points between now and the first quarter of 2026, arguing the central bank will place greater weight on signs of labour market weakness than on what it views as a temporary rise in inflation.
At his press conference, Chair Jerome Powell highlighted that “labour demand has softened and the recent pace of job creation appears to be running below the break-even rate needed to hold the unemployment rate constant.” Nonfarm payrolls have averaged just 27,000 a month since May, with the Bureau of Labor Statistics recently revising total payrolls down by 911,000. Initial jobless claims are at their highest since late 2021.
UBS said the Fed will continue balancing labour market concerns with still-elevated inflation. Core inflation held at 3.1% y/y in August, while leading indicators such as the ISM services prices paid index remain firm. Tariff-related price pressures could linger, although Powell stressed these should amount to only a one-off increase.
The Fed’s projections show inflation returning close to target by 2027, with Powell noting that both market-based and survey measures of long-term expectations remain “rock solid” at levels consistent with the 2% goal.
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How is this likely to impact markets ahead?
Additional cuts could weigh on the dollar, especially if peers hold steady.
Expect downward pressure on front-end yields; anchored inflation expectations cap long-term rise.
Easing bias supportive for risk assets, though labour weakness may temper optimism. US equity index hit new record highs in Thursday trade.
For commodities, tariff-driven inflation viewed as one-off, limiting Fed tightening risk.
