Economists at UBS reiterated their prediction for a soft landing of the U.S. economy on Monday, expecting the Federal Reserve to start cutting interest rates in September.
UBS pointed out that since the beginning of the pandemic, economic data has shown unusual fluctuations, but some trends now seem to be settling.
The labor market, which was severely overheated two years ago, has now returned to near pre-pandemic levels, thanks to robust growth in labor supply.
Additionally, retail sales and inflation are showing signs of slowing down. In May, the core CPI, which excludes food and energy prices, rose by only 0.16% month-over-month, the smallest increase since August 2021.
Although the year-over-year core inflation rate is trending downward, it remains significantly higher than pre-pandemic levels.
Economists wrote, "Housing inflation, in particular, has been more stubborn than we expected, but based on new rental information, we still believe a slowdown in the coming months is inevitable."
Regarding monetary policy, the Federal Reserve kept interest rates unchanged at its June meeting, in line with market expectations.
The current median forecast shows only one 25 basis point rate cut by the end of the year, down from three in March, suggesting a possible hold until December. However, economists noted that the Fed's economic forecasts remain stronger than expected, supporting a delay in the start of rate cuts.
They stated, "We still believe that with the Fed receiving more moderate data on growth, the labor market, and inflation, it will have the conditions to cut rates in September. We believe the Fed may hold rates steady longer than our baseline forecast, but we still consider further rate hikes unlikely."
