Strategists at UBS Investment Bank have made bold predictions regarding the Federal Reserve’s future interest rate cuts. They expect the central bank to embark on a substantial monetary policy easing cycle, cutting interest rates by 275 basis points in the coming year. This projection is much more aggressive than what the markets are currently pricing.

The strategists argue that a persistent decline in inflation will create favorable conditions for the Federal Reserve to initiate policy adjustments as early as March. They anticipate that the rate reductions will be substantial, mirroring a typical easing cycle.

UBS Investment Bank’s outlook is anchored in the belief that the US economy will slip into a recession by the second quarter of the upcoming year. They anticipate the benchmark federal funds rate to drop to a range between 2.5% and 2.75% by the end of 2024, with a terminal rate of 1.25% projected by early 2025.

In contrast, money markets are currently pricing in a more conservative scenario, expecting the Federal Reserve to cut rates by only 75 basis points, with the process commencing in July.

To support their forecasts, the strategists point to historical easing cycles over the last three decades, where central banks in Group of 10 countries typically lowered interest rates by an average of 320 basis points over a span of 15 months. They argue that this time will be no different, with major central banks expected to engage in more aggressive rate cuts than what the markets are currently factoring in.

Wall Street banks remain divided in their outlook for policy easing. Morgan Stanley anticipates substantial rate reductions reaching 2.375% in 2025, while Goldman Sachs maintains a more conservative stance, forecasting fewer cuts and a later initiation of the easing cycle reaching 3.5% to 3.75% by 2026.

UBS Investment Bank also provides insights on the euro zone, where they anticipate the region to narrowly avoid a recession. This outlook would enable the European Central Bank to delay its own policy easing measures. They expect the ECB to commence its cutting cycle following the Federal Reserve, starting in June, and to implement rate cuts totaling 75 basis points.

While the anticipated trajectory of lower interest rates by the Federal Reserve is likely to weaken the US dollar and exert downward pressure on Treasury yields, UBS Investment Bank anticipates that the 10-year Treasury yield will bottom out at 3.5% in the next year, as the issuance of US debt remains elevated.