UBS Global Wealth Management now projects the Federal Reserve will raise rates by 25 basis points in both September and December 2026, reversing its earlier forecast of no policy adjustments for the year. The firm expects the first hike on Sept. 16, pushing the federal funds rate to 3.75-4.00 percent, with a second identical increase on Dec. 9 lifting the rate to 4.00-4.25 percent.
The shift stems from a stronger-than-expected August jobs report and recent hawkish signals from Fed officials. U.S. employers added 162,000 jobs in August, topping estimates, while the unemployment rate held steady at 4.1 percent. UBS Chief U.S. Economist Jonathan Pingle cited these factors in his revised assessment.
Fed Chair Kevin Warsh's Jackson Hole speech in August and Fed Governor Christopher Waller's recent comments signaling support for maintaining rates if inflation continued to ease have reinforced hawkish expectations. CME's FedWatch tool now prices a 58 percent probability of a 25 basis point hike at the Sept. 15-16 meeting, up from 52 percent Thursday. Bond traders are recalibrating duration risk exposure accordingly.
Citigroup and Macquarie have also revised their rate forecasts higher following the August employment data, reflecting a broader shift in institutional consensus.
Pingle said his forecast remains contingent on Friday's Consumer Price Index release. The inflation print will be critical to the Fed's policy calculus. He also underscored that understanding Warsh's reaction function—how the policymaker responds to incoming data—continues to evolve, shaping how bond markets price future moves and the yield curve's trajectory.
UBS pointed to rising inflation risks from supply bottlenecks as reinforcing the case for rate adjustments. Persistent supply chain pressures could keep price increases elevated, potentially spurring further Fed action.
