UBS Global Wealth Management expects the Federal Reserve to continue raising interest rates into 2027 after stronger-than-expected annual inflation in September.
The bank has revised its monetary policy outlook and now anticipates two additional quarter-point rate increases, one in December and another in early 2027.
The forecast points to a longer tightening cycle than previously expected, followed by an extended pause.
The Fed raised rates by 25 basis points last month to a range of 3.75%-4.00%, marking its first increase since 2023.
While markets had already been anticipating another move in December, the latest inflation figures have strengthened expectations that monetary policy could remain restrictive for longer.
UBS sees another rate hike
In a research note by economist Andrew Dubinsky, UBS outlined a more aggressive path for interest rates following the September inflation report.
The bank expects the Fed to deliver another quarter-point increase in December before raising rates by a further 25 basis points in March 2027.
UBS then expects policymakers to pause and assess the cumulative impact of the tightening cycle.
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“The combination of stronger goods inflation with strong services inflation supports a higher-for-longer Fed outlook.”
He described the September inflation report as a hawkish surprise, noting that although energy prices accounted for much of the increase in headline inflation, both core goods and core services inflation accelerated.
“The September report was a hawkish surprise: Much of the headline strength reflected energy, but the simultaneous acceleration in core goods and core services should keep the Fed focused on inflation risks and reinforce higher-for-longer policy expectations,” Dubinsky wrote.
UBS said the extended tightening cycle was intended to keep inflation expectations anchored while inflation remained near 3% amid overlapping economic shocks.
“The longer tightening cycle is designed to ensure inflation expectations stay anchored while inflation remains near 3% due to overlapping shocks,” the bank said.
September inflation keeps pressure on Fed
The latest consumer price index (CPI) report showed that inflation accelerated in September, with rising gasoline prices accounting for more than half of the monthly increase.
The CPI, which measures changes in the prices of goods and services across the US economy, rose a seasonally adjusted 0.6% from August.
The annual inflation rate climbed to 3.7%, exceeding the 3.6% increase forecast by economists surveyed by Dow Jones.
The monthly increase was in line with economists’ expectations, but the higher annual reading added to concerns that inflation remains persistent.
The figures have complicated the outlook for the Fed as it weighs the need to bring inflation under control against the effects of higher interest rates on economic activity.
Markets reassess rate hike probabilities
Interest-rate futures have responded to the inflation report by raising the implied probability of further Fed tightening.
According to CME FedWatch data, markets were pricing in a roughly 27% probability of a rate increase at the Fed’s October meeting, up from 21.6% before the CPI release.
The probability of a December rate increase stood around 90%, suggesting that investors see another move before year-end as increasingly likely.
This post UBS predicts third rate hike early next year after September inflation data may be modified as updates unfold
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