UBS Reverses Forecast, Now Expects Two Fed Rate Hikes This Year

Less than three months after predicting no further interest rate changes by the U.S. Federal Reserve in 2026, UBS has dramatically reversed its outlook. The Swiss bank now anticipates the Fed will raise its benchmark interest rate twice this year, by a quarter percentage point each in September and December. This shift follows a robust August jobs report, which showed 162,000 new jobs added, significantly exceeding forecasts, and maintained an unemployment rate of 4.1%. These figures suggest the labor market remains strong enough to withstand higher interest rates.

This change is particularly notable as UBS had only in June abandoned its forecast for rate cuts this year, expecting no further adjustments until March and June 2027. The bank now cites three key factors for its revised forecast: hawkish signals from Fed Chair Jerome Powell, particularly his Jackson Hole speech; rising inflation risks due to supply-side bottlenecks; and the recent strong employment data. The current U.S. interest rate stands between 3.5% and 3.75%, unchanged since July.

If UBS's new forecast materializes, the rate would rise to a range of 3.75%-4% in September and 4%-4.25% by December, effectively reversing some previous rate cuts. Other financial institutions, including Citigroup and Macquarie, have also adjusted their rate forecasts following the latest jobs report, with the market increasingly pricing in the possibility of monetary tightening. CME FedWatch data indicates a roughly 58% probability of a quarter-point hike at the September 15-16 meeting, up from about 52% before the jobs data release.

However, the Fed's decision remains uncertain. Fed Governor Christopher Waller indicated that moderating inflation data would lead him to favor holding rates steady, while upside inflation surprises could prompt a rate hike. Upcoming inflation figures are therefore seen as a crucial indicator for the Fed's next move. Meanwhile, in stark contrast, the Bank of Israel on September 1st cut its interest rate by a quarter percentage point to 3.25%, marking its third consecutive reduction since May, citing moderating inflation and a strengthening shekel. This divergence creates a widening interest rate gap between the U.S. dollar and the Israeli shekel, potentially impacting foreign exchange markets.