UBS extends Fed rate-hike outlook into 2027 after inflation surprise

Traders Union
All News
Financial News
UBS extends Fed rate outlook

Highlights

UBS Global Wealth Management now expects the Federal Reserve to hike rates in December and again in March 2027, extending the tightening cycle.
September's strong goods and services inflation, along with risks from AI demand, Middle East supply disruptions, and trade policy, support a more restrictive Fed policy outlook.
CME FedWatch shows market odds of a December rate hike at 89.5%, up sharply after the latest CPI data, signaling expectations for higher-for-longer rates.

UBS outlook points to longer tightening cycle

As reported by Reuters, UBS Global Wealth Management expects the Federal Reserve to follow its September rate increase with another quarter-point hike in December and a third move in March 2027. The Fed raised rates by 25 basis points in September, its first increase since 2023, and UBS says the latest inflation data support a higher-for-longer policy path.

UBS economist Andrew Dubinsky said in a note on Wednesday that stronger goods inflation alongside firm services inflation supports a more restrictive Fed outlook. UBS also says risks tied to AI-driven demand, Middle East-related supply disruptions and trade policy uncertainty could keep the central bank biased toward tighter policy for longer.

The bank says the extended tightening cycle is intended to keep inflation expectations anchored while inflation remains near 3% because of overlapping shocks. The Fed is scheduled to meet on October 27-28.

Market pricing and broader central bank signals

Rate futures are also reflecting firmer expectations for additional tightening. According to CME FedWatch data, markets are pricing in roughly a 27% probability of a rate hike at the October meeting, up from 21.6% before the consumer price index report, and an 89.5% chance of an increase in December.

The UBS view aligns with a broader global message from central banks, which have signaled they are prepared to keep monetary policy restrictive for longer as inflation proves more persistent than expected. For investors and businesses, that points to a prolonged period of elevated borrowing costs and tighter financial conditions.

Our earlier coverage of the September CPI surprise explained how Treasury yields moved as investors digested hotter-than-expected inflation ahead of the Fed’s next decision. We noted that, despite the inflation uptick, demand for government bonds was supported by risk repricing tied to AI-related spending, tight financing conditions, and shifting expectations around the policy path.

This material may contain third-party opinions, none of the data and information on this webpage constitutes investment advice according to our Disclaimer. While we adhere to strict Editorial Integrity, this post may contain references to products from our partners.