UBS has revised its outlook for US monetary policy, now expecting the Federal Reserve to implement two interest rate increases this year. This adjustment comes after robust employment figures for August indicated ongoing resilience in the US labor market.
UBS revises Fed projection following jobs growth
The Swiss bank, a leading global financial services firm, now predicts 25-basis-point rate hikes in both September and December. This is a reversal of its previous forecast, which had anticipated no changes to policy rates for 2026.
The bank’s shift coincides with market reactions to stronger-than-expected hiring. US employers added 162,000 jobs in August, significantly surpassing consensus estimates of roughly 55,000. The unemployment rate remained stable at 4.1%.
Market expectations have increased for a rate hike at the September 15-16 Federal Open Market Committee meeting. The CME FedWatch tool showed pricing for a 60.4% probability of a 25-basis-point increase, up from 59.4% at the end of the previous week.
UBS pointed to a combination of stronger hiring, hawkish statements from Fed Chair Kevin Warsh at the Jackson Hole symposium, and renewed inflation concerns resulting from supply chain issues as key reasons for its updated rate forecast.
The bank emphasized that the effects of higher rates would likely depend on the underlying drivers, such as whether the Fed move is a response to economic growth or persistent inflation.
“A Fed responding to US economic strength is very different from a Fed responding to inflation problems,” UBS strategists noted.
UBS also highlighted that investment strategies should be tailored to the reasons behind the rate increases, as implications for asset classes could differ significantly.
Opportunities for equities and bonds
Despite acknowledging that higher yields could trigger near-term volatility, UBS maintains a positive stance on global equities. The bank cited continued investment in artificial intelligence-related capital projects, ongoing economic resilience, and broad-based earnings growth as support for equity markets.
UBS said it continues to favor industries tied to artificial intelligence, power infrastructure, natural resources, and longevity themes. According to the bank, these sectors are set to benefit from long-term structural changes and advancements in productivity.
Government bonds were also described as presenting possible investment opportunities. UBS suggested that, due to increased yield levels, medium- to longer-duration bonds may become more attractive, especially if tighter monetary policy builds market confidence in the Fed’s dedication to price stability.
As a result, the bank said it no longer recommends locking in yields on short- to medium-duration bonds, emphasizing that yield prospects for these securities have diminished as policy expectations shifted.
Mixed outlook for dollar and gold
UBS indicated that a more hawkish posture from the Fed could support the US dollar, particularly if there is policy divergence between the US and other major central banks. The bank linked continued dollar strength to factors such as strong economic growth, tighter monetary conditions, and higher capital inflows.
Gold, meanwhile, is likely to experience near-term headwinds from rising interest rates and a firmer US dollar. Nonetheless, UBS acknowledged that continued inflation, geopolitical instability, and doubts about US fiscal and monetary policies could maintain gold’s status as a portfolio hedge.
UBS strategists described gold primarily as a portfolio hedge and diversifier, rather than as a tool for short-term speculation on Fed moves.
The bank suggested that, across asset classes, investor focus should remain on broader macroeconomic conditions and inflation trends, rather than the outcome of a single Fed decision.
Mini dictionary: UBS, or Union Bank of Switzerland, is one of the world’s largest multinational investment banks and financial services firms, based in Zurich and Basel. The company provides wealth management, asset management, and investment banking services globally.
