With investors fixated on the Federal Reserve’s next move, UBS managing director and senior portfolio manager Jason Katz weighed the odds of further interest rate cuts during a recent appearance on Varney & Co. The discussion centered on whether cooling inflation and mixed growth data will push policymakers to ease more in coming meetings, or hold rates to keep price pressures in check.
Katz framed the debate as a trade-off between taming inflation and preserving a slowing expansion. He noted that market expectations have swung week to week as new data lands. The outlook matters for households, companies, and governments, because borrowing costs ripple through mortgages, credit cards, corporate debt, and municipal budgets.
Market Expectations Shift With Each Data Point
Traders have struggled to pin down the path of policy. Futures markets have priced in different numbers of cuts this year depending on inflation releases and jobs reports. Katz said the bar for additional easing remains data dependent. Any hint of sticky prices can push expectations back.
He pointed to two anchors for the Fed: inflation that remains above its 2% goal on some measures, and a labor market that is cooler than last year but still resilient. That mix leaves officials cautious about moving too fast. It also keeps a “soft landing” in play if price gains slow without a sharp rise in unemployment.
Economic Signals Driving the Debate
Recent inflation readings show progress from the peaks of the pandemic era. But services prices and shelter costs have proven slow to recede. Wage growth has moderated, yet remains firm in some sectors. Consumer spending has cooled from earlier surges, with credit conditions tighter than a year ago.
- Inflation: Lower than last year’s highs, but not back to target on core measures.
- Jobs: Hiring has eased; job openings are down, layoffs remain contained.
- Growth: Consumer and business activity are uneven across regions and sectors.
- Financial conditions: Treasury yields and mortgage rates have eased from recent peaks but remain elevated.
Katz argued that a careful pace of cuts would help reduce financing costs without re-igniting price pressures. He also warned that cutting too slowly risks a deeper slowdown as higher rates weigh on credit and investment.
Winners, Losers, and the Portfolio Question
Interest rate moves touch every corner of the economy. Katz outlined how additional easing would filter through assets and industries. Lower rates tend to lift rate-sensitive stocks, compress bond yields, and support homebuying. But the timing and scale matter.
He highlighted areas that could benefit if the Fed trims further:
- Housing and construction, where mortgage rates drive demand.
- Small-cap and highly leveraged firms, which face higher refinancing costs.
- Utilities and other dividend payers, which compete with bond yields.
At the same time, banks may face margin pressure if funding costs do not fall as quickly as lending rates. Energy and materials could react to growth signals more than to policy moves alone. For bonds, Katz said intermediate maturities offer a balance of yield and duration if cuts proceed gradually.
Risks If The Fed Holds Steady
If policymakers pause for longer, Katz sees risks to areas tied to credit and cyclical demand. Auto sales, commercial real estate, and parts of manufacturing could feel the pinch of higher carry costs. Equities that rallied on easing hopes could retrace if cuts slip into next year.
Still, he noted that a steady policy path may help the Fed anchor inflation expectations. That could set the stage for a more durable easing cycle later, if prices keep trending lower without a sharp drop in jobs.
What To Watch Next
The path forward runs through upcoming inflation and employment reports, as well as Fed speeches and meeting minutes. Katz said he is watching signs of cooling in services inflation, shelter disinflation gaining traction, and any softening in wage growth. He also tracks credit spreads for stress in corporate debt.
For investors, he suggested patience and diversification. Maintaining quality in both equities and fixed income can buffer surprises. He favors flexible bond strategies that can add duration as the policy path becomes clearer.
The debate over further cuts is not settled. Progress on inflation, steady hiring, and careful messaging from the Fed could allow a modest easing cycle. A miss on prices or growth could change the script quickly. For now, Katz sees a narrow path, with data in the driver’s seat and volatility likely around each release. The next few reports may decide whether borrowing costs ease this year or stay higher for longer.
