UBS says Fed unlikely to raise rates despite housing pressures and AI investment

• The FOMC voted 9-3 in July to hold rates steady, with three regional presidents dissenting in favor of an immediate increase as 30-year mortgage rates reached a one-year high of 6.66%
• Annual home sales have slowed to four million units, well below the historical norm of 5.2 million, with families now spending 34% of income on median-priced home payments
• AI-related memory chip prices have added 20-30 basis points to core inflation, but UBS considers this temporary while noting that wage inflation remains subdued compared to the dotcom era

Summary:

UBS expects the Federal Reserve to maintain its current interest rate policy despite conflicting economic pressures from housing market stress and robust AI-driven investment. Fed Chair Kevin Warsh, nearing 100 days in office, faces this challenge ahead of the Jackson Hole Economic Policy Symposium (Thursday-Saturday).

Key Figures:

• The Federal Open Market Committee voted 9-3 in July to hold rates at 3.5%-3.75%, with three regional presidents favoring an immediate increase
• Thirty-year fixed mortgage rates have climbed to 6.66%, a one-year high
• Families now spend 34% of income on median-priced home payments
• Weekly mortgage applications declined 6.4%
• Annual home sales slowed to approximately 4 million units, significantly below the 5.2 million historical average

AI Investment Impact:

Technology companies are projected to invest $820 billion in data centers this year, spending largely immune to borrowing costs. Surging memory chip prices tied to AI demand have added 20-30 basis points to core inflation, though UBS views this as a temporary supply bottleneck rather than systemic overheating.

Market Implications:

UBS argues that wage inflation remains subdued compared to the dotcom era (when it reached 6%), and AI-driven workforce automation may further restrain wage pressures. The bank anticipates no rate increases despite housing market challenges, as AI investment strength and contained wage growth offset housing sector weakness.

The analysis suggests a Fed focused on balancing sectoral divergence rather than implementing broad monetary policy changes.