① Facing a more hawkish Federal Reserve than expected, Wall Street forecasts that the Fed will raise interest rates this year have recently grown louder.
② However, not all Wall Street investment banks agree that the Fed will hike rates this year. UBS believes the market may have overestimated the risk of Fed rate hikes.
③ The bank expects the Fed to keep rates unchanged for the remainder of 2026, and then restart an easing cycle in early 2027.
The bank also stated that it believes the Federal Reserve’s policy pivot is not as hawkish as it appears on the surface. If the Strait of Hormuz remains open to normal navigation on a sustained basis, it would reduce the risk of energy prices continuing to drive inflation higher, and the dot plot at subsequent policy meetings is also expected to reflect this improved outlook.
The bank further noted that many of the more hawkish projections appear to come from officials without voting rights. The advancement of work by the dedicated task forces may lead the Fed to take a cautious stance on adjusting interest rates before relevant conclusions are released at the end of the year. Warsh announced at a press conference following last week’s rate decision the launch of a comprehensive policy review project, establishing five dedicated task forces covering areas including communication mechanisms, balance sheet management, data sources, productivity and employment, and inflation assessment. “Our baseline forecast is that the Fed will keep rates unchanged for the remainder of this year and resume easing in early 2027. We believe the market’s expectations for policy tightening by the Fed and other major central banks are too high. Based on this judgment, we recommend allocating to quality short- and medium-duration bonds to lock in attractive yields,” UBS wrote. It is worth noting that UBS is not the only Wall Street bank that believes the Fed’s next rate move will be a cut. Citibank currently expects the Fed to cut rates in October and December 2026, followed by another cut in January 2027. Overall, however, in the face of a more hawkish Fed than expected, voices on Wall Street predicting that the Fed will raise rates this year have grown increasingly loud in recent days. Lindsay Rosner, head of multi-sector investing at Goldman Sachs Asset and Wealth Management, recently warned that the “probability is relatively high” of a Fed rate hike in July, at 50%. She pointed out that upcoming inflation data, particularly the personal consumption expenditures report, are key factors that could prompt the Fed to act.
