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The Federal Reserve's next steps on interest rates will be guided by economic data, according to a report by UBS.
While the major global markets reacted negatively to the change in rate cut cycles by Fed for next year the report noted that Fed will continue to monitor the economic conditions and various data before taking any step. It said, "We believe the Fed remains data-dependent, and future economic indicators will continue to play a significant role in shaping the US central bank's next steps". The report noted that key indicators, such as the personal consumption expenditures (PCE) price index, will play a critical role in shaping the central bank's policy. The PCE index, which is the Fed's preferred measure of inflation, is set to be released this Friday. The report however expects inflation to moderate in the months ahead, which could influence the Fed's policy outlook. Additionally, jobs data will remain a significant factor as the central bank evaluates the strength of the labour market and overall economic resilience. The report highlighted positive trends in the US economy. It pointed to resilient economic activity, lower borrowing costs, and broader earnings growth as supportive factors for the financial markets. It emphasized the increasing monetization of artificial intelligence (AI) and the possibility of greater capital market activity, especially under a potential second Trump administration, as contributing to a favourable environment for US equities. Although the Fed indicated that the pace of rate cuts may be slower than previously expected, however, it said that the broader direction towards easing rates remains clear, offering some clarity for investors navigating the current economic climate. The report also mentioned that investors should deploy excess cash into high-quality and diversified fixed-income strategies, select equity income strategies, and structure investment approaches. These investments may offer income generation and portfolio diversification, as lower interest rates will likely erode returns on cash next year. (ANI)
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