UBS: Fed to raise rates when US inflation is over 2%

In opinion of Union Bank of Switzerland’s research team, the US Fed is likely to raise rates when inflation is over 2% and in addition the growth rate of the economy would also need to be over 2%.

Key Quotes

“Wage growth is an inflat pressure. US labor market is very strong. Wage growth is 3.5% to 4.0% today Companies are not just having to pay more to attract new staff. Companies are having to pay more to stop existing staff from leaving. In any major economy, domestic labor costs are over two-thirds of company costs, so this matters.”

“However, higher costs do not always mean higher inflation. Companies may cut their profit margins, if they are not confident they can pass costs on to customers. The US profit share of the economy is at a very high level & could easily come down.”

“UBS expects global equity earnings growth to be slower than global economic growth in 2019, which suggests profits may grow more slowly than the economy.”

“US inflation today is normal – in line with its long-term average. At some point, price increases should allow the Fed to raise US rates. But investors might want to consider if labor cost inflation will hit profits too.”