UBS now expects the Federal Reserve to raise rates twice in 2026, in September and December, after a stronger-than-expected August jobs report and a hawkish Jackson Hole speech from Fed Chair Kevin Warsh. The bank still calls this hiking cycle supportive for equities, arguing the moves reflect economic strength rather than runaway inflation.
UBS has abandoned its prior call for the Fed to hold rates steady through 2026, now expecting two 25 basis point hikes this year. The bank draws a sharp line between a Fed hiking because the economy is strong and one hiking because inflation is getting away from it, and it is the former reading that keeps its equity outlook intact. Tightening alongside resilient growth, AI capital spending and firm employment has historically supported risk assets, even through short-term volatility, whereas hikes driven by weakening growth and inflation would be read very differently.
Why UBS turned more hawkish
Nonfarm payrolls rose 162,000 in August, with private payrolls up 127,000 against consensus of 55,000, plus 55,000 in upward revisions to prior months. The unemployment rate held at 4.1% as job creation was offset by higher labor force participation. July PCE inflation came in above expectations at 3.7% year-on-year, alongside a hawkish tone from Warsh at Jackson Hole. Supply bottlenecks flagged in recent ISM and PMI surveys have added to upside inflation risk, and UBS also notes early signs that AI-related demand pressures may be broadening.
As a result, market-implied odds of a September rate hike rose from around 50% to roughly 60% following the data. The S&P 500 slipped only 0.4% on the day.
Two hikes now priced into UBS's forecast
UBS expects 25 basis point hikes in September and December, taking the fed funds range to 4.00-4.25%. The bank also raised its two-year Treasury yield forecast to 4.25% by June 2027. It lifted its 10-year forecast to 4.5% as well, while maintaining a constructive view on global equities. It continues to favor exposure to AI, power and resources, and longevity themes through the hiking cycle.
Bonds and the dollar face a more mixed picture. Higher yields reduce the case for parking money in short-duration debt over cash, while medium- to long-duration quality bonds are framed as offering both income and a diversification hedge if growth slows. The dollar should find near-term support from the more hawkish path, though UBS notes that support would weaken if the hikes end up being inflation-led rather than growth-led.
What UBS tells equity investors to do next
UBS is framing the run-up to the Fed's September 15-16 meeting as a window to act rather than a period to sit out. That window includes the August CPI report due September 11. It advises treating any volatility around those releases as a chance to bring allocations back toward target, rather than a signal to retreat.
Source: Investinglive
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