Federal Reserve Rate Hikes
UBS Forecasts Federal Reserve Interest Rate Hikes in September and December
Anonymous
Key Points
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At the Fed’s July meeting, three FOMC members dissented from the decision to hold the federal funds target at 3.50%–3.75%, favoring a 25-basis-point hike instead—evidence that support for tighter policy was already emerging before the August jobs report.
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At Jackson Hole, Fed Chair Kevin Warsh described the Fed’s 2% inflation goal as a “firm, fixed target” and said the central bank bears responsibility for 65 months of elevated inflation, while rejecting preset forward guidance in favor of responding to incoming data.
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UBS’s earlier June baseline had pushed potential rate cuts to March and June 2027, rather than merely anticipating no policy change for the remainder of 2026; the newer hike forecast therefore represents a sharper shift in the policy outlook.
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Beyond utilities, infrastructure and selected growth stocks, UBS’s broader rate-hike playbook favors financials and commodities over growth equities that are more sensitive to borrowing costs.
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UBS identified supply-chain-related inflation risks, alongside hawkish remarks from Warsh and robust labor-market data, as specific reasons for revising its rate forecast.
UBS now expects the Federal Reserve to raise interest rates by 25 basis points in both September and December 2026, a sharp reversal from its earlier forecast of no further hikes this year. UBS made the shift after August jobs data showed 162,000 positions added and a 4.1% unemployment rate, combined with hawkish signals from Fed Chair Kevin Warsh and lingering inflation concerns.
The outlook signals that markets must prepare for continued tightening rather than an extended pause. UBS advises investors to favor assets that can withstand higher rates, including medium- to long-term Treasuries, utilities, infrastructure, and selected growth stocks backed by AI investment.
Warsh's Hawkish Stance Signals Fed Shift
Fed Chair Kevin Warsh sent a strong message at Jackson Hole, calling the Fed's 2% inflation target a "firm, fixed target" and saying the central bank bears responsibility for 65 months of elevated inflation. UBS noted that Warsh rejected preset forward guidance, instead favoring data-dependent decisions going forward.
These remarks from Warsh reflected emerging consensus within the Fed. At the July meeting, three FOMC members dissented from holding the federal funds rate steady, preferring a 25-basis-point hike instead. UBS identified these dissents as evidence that support for tighter policy was already building.
Jobs Report and Inflation Risks Drive Reversal
The August employment data proved decisive. With 162,000 jobs added and unemployment at 4.1%, the labor market signaled resilience that made rate cuts less likely. UBS also pointed to supply-chain inflation risks as a reason for pivoting toward hikes rather than holding steady.
This represents a major pivot from UBS's June baseline, which had pushed potential rate cuts to March and June 2027. The newer forecast for September and December hikes shows a sharper shift in the policy outlook than a simple pause would have suggested.
Portfolio Strategy for a Hiking Cycle
UBS recommends moving beyond utilities and infrastructure into financials and commodities, which should outperform during rate hikes. Growth equities that depend on low borrowing costs face downside risk if hikes trigger earnings downgrades and broader valuation compression.
Duration-heavy and highly valued growth assets remain vulnerable. If inflation-driven hikes unfold, these holdings could suffer sharp losses. UBS suggests positioning for volatility and building defenses through assets resilient to higher rates and tighter financial conditions.
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