UBS analysts expect the Federal Reserve to raise interest rates twice before the end of 2026, citing comments from Fed Chair Kevin Warsh and recent U.S. employment data.
Analysts including Jonathan Pingle and Abigail Watt said Warsh’s remarks at the Federal Reserve’s Jackson Hole event supported the case for higher interest rates.
Warsh said policymakers “must be confident” that underlying inflation is moving towards the Fed’s 2% target “clearly and at sufficient speed,” adding that, if this does not occur, “we have work to do.” He also identified interest rates as the primary instrument of monetary policy.
“[Warsh] threw down the gauntlet. Now, with his credibility on the line, we expect he has little choice but to put his monetary policy where his mouth is,” the UBS analysts said.
UBS Forecasts September and December Rate Increases
UBS currently expects two quarter-point interest-rate increases during the remainder of 2026, with one at the Fed’s September meeting and another in December.
However, the analysts described the forecast as “not high conviction” and said it remains dependent on incoming economic data.
They said a weaker-than-expected August consumer price index reading this week, for example, could “undo this assessment.”
Markets are pricing in an approximately 60% probability of a 25-basis-point increase this month. The shift in expectations follows data showing that the U.S. economy added substantially more jobs than anticipated in August.
Higher borrowing costs can weigh on employment growth, while continued labour-market resilience can support the case for higher rates.
UBS Calls September Fed Decision a Close Call
Despite forecasting an increase at the September meeting, UBS said the outcome remains uncertain.
“We see the September decision as a close call. That is partly because we expect […] Warsh to weigh the principles he laid out alongside market pricing, his assessment of how rates have moved in between meetings, and the views and argument of his colleagues,” the UBS analysts said.
UBS therefore expects Warsh’s previously stated policy principles, market expectations, changes in interest rates between meetings and the views of other Fed policymakers to factor into the September decision.