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Investors Anticipating Aggressive Fed Rate Cut May Be Overly Optimistic, UBS CEO Warns
The CEO of UBS, a prominent Swiss banking institution, has cautioned that the markets may be overly optimistic regarding the likelihood of the U.S. Federal Reserve implementing a significant rate cut. In an interview on CNBC's 'Squawk Box Asia,' Ermotti expressed his views, stating, "I believe the market appears to be somewhat ahead of the curve in anticipating such aggressive action from the Fed."
Ermotti emphasized that the battle against inflation is ongoing, and some investors might be prematurely expecting a substantial rate reduction from the Federal Reserve in the upcoming month. The anticipation of whether the Fed will decrease rates during its next policy meeting on September 18 has been largely settled; the remaining uncertainty revolves around the extent of any potential cut.
Recent data released on Wednesday indicated the core U.S. price index, which excludes fluctuating food and energy prices, rose by 0.3% in August, surpassing projections of a 0.2% increase. This increase in core CPI may diminish the likelihood of a significant interest rate cut by the Federal Reserve in their upcoming meeting. Ermotti stated, "I would anticipate a cut, but not to the extent that the market is predicting."
According to the CME Group's FedWatch Tool, traders are currently estimating an approximately 85% probability of a 25 basis point (bps) reduction in September, while 15% are still considering the possibility of a 50 bps cut. A basis point equates to a 0.01 percentage point change. The Fed's current benchmark borrowing rate stands at 5.25%-5.50%, which affects a range of other consumer rates.
Ermotti expressed that a long-awaited soft landing for the economy could still be achievable, noting that other economic indicators seem to support such a perspective. He remarked, "There is considerable stickiness in certain areas of inflation, but consumers are managing quite well." He added, "At this moment, the outlook appears to align with a soft landing, leading us to maintain a cautiously optimistic stance."
Furthermore, Ermotti shared his positive outlook for Asia, stating that while UBS recognizes "very good momentum" in the region's growth, it is not insulated from the challenges posed by geopolitical tensions and the broader global economic climate. Despite the bleak economic forecast for China, Ermotti reaffirmed UBS's commitment to the country and the opportunities it presents, saying, "We have been in China for over 50 years, and we plan to continue our presence for the next hundred or two hundred years."
Last month, UBS exceeded profit expectations for the second quarter, announcing a net profit of $1.136 billion attributable to shareholders, driven by cost-cutting initiatives and rising revenue from its global wealth management and investment banking divisions. The consensus forecast compiled by the company was $528 million. Ermotti concluded by stating, "The two primary opportunities and growth engines for us remain the U.S. and Asia in general, with China being a key contributor."
Original Article: https://www.cnbc.com/2024/09/12/investors-expecting-an-aggressive-fed-cut-are-getting-too-ahead-of-the-curve-ubs-ceo-says.html
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