UBS strategists continue to predict a soft landing for the U.S. economy, with the Federal Reserve’s rate cuts playing a key role in sustaining the current expansion.
While recent economic growth has been robust, with a 3% gross domestic product (GDP) increase in the second quarter and the Atlanta Fed’s third-quarter estimate currently tracking at 2.9%, UBS views this as only part of the picture.
Analysts point out that several business surveys are beginning to show signs of weakening, and the Federal Reserve’s Beige Book indicates a cooling economy. The labor market is also softening, as evidenced by a rising unemployment rate.
Moreover, UBS notes that the broad disinflation reflected in the CPI data seems inconsistent with an economy growing at a 3% rate.
“Growth has been mainly driven by consumer spending, which remains strong despite only mediocre growth in disposable income, a situation that is unlikely to persist for much longer,” UBS strategists remark.
Despite these concerns, their base case remains a soft landing, with rate cuts from the Fed expected to prevent “anything worse than a mild slowdown.”
The Fed slashed interest rates by 50 basis points last week, marking a larger-than-usual cut after 14 months of holding rates steady.
Previously focused on combating inflation, the Fed is now balancing labor market risks with inflation concerns.
During his press conference, Fed Chair Powell emphasized that this cut doesn’t indicate any serious economic issues and maintained a positive outlook on conditions.
The Fed’s “dot plot” suggests another 50 basis points of cuts by year-end, with an additional 100 basis points in 2025, aligning with expectations.
Powell reiterated that future decisions will be data-driven and made on a meeting-by-meeting basis. In the event of a hard landing, the Fed could respond with more aggressive cuts.
