Recent economic data from the United States suggests that the urgency for the Federal Reserve to aggressively cut interest rates has diminished, according to insights from the UBS desk. The market currently anticipates a total of 100 basis points (bp) in rate cuts over the remaining three Federal Open Market Committee (FOMC) meetings of 2024. However, the economy likely requires only about 50bp to recalibrate policy to a more appropriate stance. Despite this, the Fed is expected to deliver 75bp in cuts to avoid disrupting the market and to ensure it remains proactive in managing economic growth.

Revisiting Q2 GDP and Fed’s Response

The upward revision to the second quarter GDP might be seen as looking in the rearview mirror, but it holds significance. Back in June, the FOMC assessed the economy as sufficiently robust, prompting a shift in the dot plot from anticipating 75bp of cuts to only 25bp. At that time, Fed Chair Jerome Powell emphasized that this decision was incredibly nuanced, suggesting that a 50bp cut could have been equally justified.

Economic Slowdown in Line with Expectations

Since then, the economy has indeed shown signs of slowing, but not beyond what the Fed had anticipated. UBS Chief US Economist Jonathan Pingle points out that employment growth is likely still within the upper range of the Fed’s forecasts. While the slowdown is evident, it doesn’t warrant significant concern from the Fed at this point.

Potential Over-Correction by the Fed

The Fed may end up cutting rates more than necessary this year, a concern echoed by some FOMC members like Raphael Bostic. If the Fed cuts too much in 2024, it could reduce the need for further cuts next year. Consequently, yields should be expected to rise, and the yield curve may bear steepen as a result.

While the market is pricing in substantial rate cuts, the latest data suggests that the Fed might only need a more measured approach. The focus remains on balancing the need to support economic growth without overreacting to current conditions. The upcoming FOMC meetings will be closely watched as the Fed navigates this delicate balance.