Fed governors appear to be leaning into a more dovish approach ahead of expected rate cuts this September, UBS observed in a research note, predicting a total 100 basis point (bps) cut over the next four meetings.
“We believe high-quality fixed income offers investors the opportunity to lock in rates higher than prevailing returns on cash, with potential for capital gains if policy becomes even more accommodative than expected,” the note stated.
While a 25 bps cut is expected in September, a larger slash is not out of the question.
Governor Christopher Waller stated yesterday that he supports a 25bps cut, based on currency data trends, but added that, if August jobs data is particularly weak, he could raise that to 50bps.
UBS advised, “By diversifying portfolios with select medium-tenor quality corporate bonds, we believe investors can lessen the impact of potential market swings in riskier assets on overall performance.”
The note explained that a cooling labour market and downside risks to employment are encouraging the Fed to ease rates, alongside a slowing US economy – GDP expanded just 1.2% in H1, and no sudden improvement is forecast. Chair Jerome Powell’s Jackson Hole speech emphasised this labour market softness, adding further fuel to expectations that policy will be adjusted.
New York Fed president John Williams also commented on Wednesday that “every meeting is, from my perspective, live”.
Currently, two-year US Treasury yields have fallen to 3.63% at print and the two- and 10-year yield spread remains at a substantial 57 bps. Fed fund futures are indicating an 83% chance of a 25 bps rate cut this September.
Equally influential in the Fed’s decision will be a slow-down on inflation, UBS expects, predicting that core inflation will hit 3.5% by year-end – just 0.4 percentage points above July’s reading.
©Markets Media Europe 2025
