UBS extends Fed tightening cycle forecast with March rate hike after inflation surprise

UBS Sees Federal Reserve Extending Rate Hikes After Inflation Surges

UBS Analysis and Federal Reserve Policy Outlook

UBS Expects Further Rate Hikes Amid Persistent Inflation

Oct 15 (Reuters) - UBS Global Wealth Management expects the Federal Reserve to raise interest rates for a third time in March 2027, extending its tightening cycle into next year after stronger-than-expected September inflation underscored broadening price pressures.

The Fed raised rates by 25 basis points in September, its first increase since 2023, and UBS expects another quarter-point hike in December.

Economist Insights on Inflation Trends

• "The combination of stronger goods inflation with strong services inflation supports a higher-for-longer Fed outlook," UBS economist Andrew Dubinsky said in a note on Wednesday.

Global Central Bank Responses

• With inflation pressures proving more persistent than expected, central banks globally have signaled they are prepared to keep monetary policy restrictive for longer.

Risks and Factors Influencing Fed Policy

• UBS added that risks from AI-driven demand, Middle East-related supply disruptions and trade policy uncertainty could keep the Fed biased toward tighter policy for longer.

• "The longer tightening cycle is designed to ensure inflation expectations stay anchored while inflation remains near 3% due to overlapping shocks," UBS said.

Upcoming Federal Reserve Meetings and Market Expectations

• The Fed is scheduled to meet on October 27-28.

• Interest-rate futures are pricing in a roughly 27% probability of a rate hike at the October meeting, up from 21.6% before the CPI report, and an 89.5% chance of an increase in December, according to CME's FedWatch data.

(Reporting by Rashika Singh in Bengaluru; Editing by Sonia Cheema)