Goldman Sachs and Swiss banking giant UBS have warned that investor expectations are way too high in relation any potential Federal Reserve rate cuts.
The U.S. stock markets have soared in the last three days following comments by Fed Chairman Jerome Powell that the central bank would consider interest rate cuts.
And according to two executives at the banking giants, the excitement that cuts will lead to access to cheaper borrowing may be coming too soon.
Axel Weber, the chairman of UBS said as much on Thursday, noting that investors are likely misreading the remarks from the Federal Reserve.
Speaking at a Finance meeting in Tokyo, Weber said that the market has moved too fast on the remarks and “overpriced” Fed’s rate cuts.
He continued that listening to key decision makers like Jay Powell and Charlie Evans revealed nothing like an “imminent rate cut.” He added that the Fed is unlikely to make any such precautionary rate cuts at the moment.
Weber, however, contended that the likelihood for corrective action from the Fed would increase if data releases showed further weaknesses in the economy.
Similar sentiments have come from Goldman Sachs president and COO John Waldron. According to Waldron, the market was banking on expectations that the Fed will make a number of key moves. He said he was a bit worried that traders were “too optimistic.”
The Goldman Sachs chief added that what the market has done is to price in over “a hundred basis points in [interest rate] cuts” at the moment. He pointed to the options markets for illustration but noted that the central bank would rely more on data than on short-term sentiment. On his part, Weber felt that a little optimism would be okay, especially if current trade conflicts do not get worse. He concluded that if the tariff wars do not escalate, then markets are likely to have “a lot of room” to maneuver and reprice.