UBS Global Wealth Management now expects the Federal Reserve to raise interest rates twice before the end of 2026, reversing its earlier call for the central bank to hold steady. The bank points to a much stronger jobs report and hotter inflation as the reasons behind the shift, while rate hikes create headwinds for equities more broadly.
UBS has scrapped its hold-steady forecast for the Federal Reserve. Kurt Reiman, the firm's Head of Fixed Income Americas, now expects two 25-basis-point hikes, one at the September 15-16 meeting and another in December, which would push the federal funds target range up to 4.00-4.25%.
What changed the math
Two data points forced the reversal. August nonfarm payrolls came in at 162,000, roughly triple the consensus estimate of around 55,000 to 56,000, while the unemployment rate held steady at 4.1%.
Inflation added to the case. July's Personal Consumption Expenditures index, the Fed's preferred gauge, came in at 3.7% year-over-year, well above the Fed's 2% target. Chair Kevin Warsh's remarks at Jackson Hole reinforced that rate relief isn't coming soon. According to Reiman, rising bond yields reflect "definitely not just the deficit" but a broader mix of forces.
Yield forecasts move higher
The hike call comes with sharp revisions to UBS's Treasury yield projections. The firm raised its two-year Treasury yield forecast by 100 basis points, now targeting 4.25% by June 2027. Over the same period, the 10-year forecast rose 40 basis points to 4.5%. UBS is advising clients to maintain diversification and rebalance toward long-term targets rather than making dramatic moves.
What it means for markets
UBS keeps a "cautiously optimistic" outlook for global equities. Higher borrowing costs from the rate hike path squeeze corporate margins, especially for heavily leveraged companies, and raise the discount rate on future earnings, which hits growth stocks hardest since more of their value sits in distant cash flows.
Despite that near-term turbulence, UBS still sees opportunity in medium- to longer-maturity high-quality bonds, provided investors stay selective on credit quality and duration rather than reaching for yield in riskier corners of the market. The bank's underlying concern is that persistent inflation keeps the Fed hawkish for longer than markets had priced in.
Source: Crypto Briefing
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