UBS has revised its Federal Reserve policy outlook, now anticipating two 25-basis-point rate hikes this year—in September and December—following a stronger-than-expected August jobs report. The bank had previously expected no policy changes in 2026, but resilient labor data and hawkish signals from Fed Chair Kevin Warsh have prompted a shift.
The August employment report showed 162,000 new jobs, far exceeding the consensus forecast of roughly 55,000, while the unemployment rate held steady at 4.1%. That marked the strongest monthly gain since March and pushed market expectations for a September hike to about 60.4%, according to CME's FedWatch tool, up from 59.4% on Friday.
UBS strategists noted that the combination of solid job growth, Warsh's comments at the Jackson Hole symposium, and rising inflation risks from supply bottlenecks were enough to change their rate forecast. However, they emphasized that the investment implications depend on the underlying reason for any tightening.
“A Fed responding to US economic strength is very different from a Fed responding to inflation problems,” the strategists said. A hike driven by growth would have different market consequences than one prompted by persistent inflation and weaker growth.
Equities and bonds: opportunities despite rate risks
UBS remains positive on global equities, even with the potential for short-term volatility from higher yields. The bank argues that stronger rates are unlikely to outweigh medium-term drivers such as AI-related capital spending, resilient economic activity, and broad earnings growth. It continues to favor sectors tied to artificial intelligence, power and resources, and longevity themes, which are expected to benefit from investment and productivity gains.
In fixed income, UBS sees a shift in strategy. With higher policy rate expectations weighing on short-duration bonds and limiting capital gains potential, the bank no longer recommends locking in yields in short- to medium-duration bonds as an alternative to cash. Instead, it sees opportunities in medium- to longer-duration bonds after the recent rise in yields. These could benefit if tighter policy strengthens confidence in the Fed's inflation control, reduces longer-term inflation expectations, or slows growth.
Dollar and gold: mixed outlook
A more hawkish Fed could support the US dollar, especially if policy divergence with other central banks widens. UBS said stronger growth combined with tighter policy could sustain the dollar through capital flows and relative economic performance.
Gold may face near-term pressure from higher real rates and a stronger dollar. However, UBS notes that persistent inflation, geopolitical uncertainty, and concerns about fiscal and monetary credibility could support bullion as a safe-haven asset. “We currently view gold more as a portfolio hedge and diversifier, rather than as a tactical expression of the next Fed decision,” the strategists said.
For investors, the broader economic backdrop and inflation trajectory will matter more than the outcome of a single Fed meeting. UBS sees potential across asset classes, but the path of policy remains data-dependent. As markets digest the latest jobs data, Treasury yields have eased from multiyear highs, and investors are watching for further clues on the Fed's next move. The hawkish stance from Fed Chair Warsh has already influenced rate expectations, and upcoming inflation reports will be critical.
While UBS's revised outlook is notable, it remains one of many forecasts. The Fed's decisions will hinge on incoming data, and markets will continue to adjust. For now, the bank sees opportunities in stocks, bonds, and gold, but emphasizes that portfolio positioning should reflect a range of scenarios.
This article is for informational purposes only and does not constitute financial advice.
