UBS said a series of important U.S. economic reports in the week ahead could determine whether the Federal Reserve has enough evidence to keep interest rates unchanged.
Investors are closely watching inflation and labor market data for signs that price pressures and employment conditions are cooling.
Fed Rate Hike Odds Rise After Warsh Comments
Markets have increased expectations for another Federal Reserve rate hike following recent comments from Fed Chair Kevin Warsh.
The implied probability of a rate increase at the Sept. 15–16 meeting climbed to around 60%, up from approximately 40%.
Warsh said policymakers need greater confidence that underlying inflation is moving toward the Federal Reserve’s 2% target at a clear and sufficient pace.
Otherwise, he warned, the central bank still has more work to do.
PCE Inflation Remains Above Expectations
Warsh’s comments followed the release of July Personal Consumption Expenditures inflation data.
The PCE index increased 0.2% from the previous month and 3.7% compared with a year earlier, coming in above expectations.
However, UBS noted that some underlying measures were more encouraging.
Market-core PCE inflation slowed to an annualized rate of 2.26% over the previous three months.
That decline could provide some evidence that underlying inflation pressures are gradually easing.
August Jobs Report Becomes the Main Focus
The August U.S. employment report will be one of the most important economic releases for the Federal Reserve.
Payroll growth is expected to recover only modestly to around 45,000 after private payrolls declined by 23,000 in July.
Meanwhile, the unemployment rate is forecast to rise to 4.2% from 4.1%.
A softer labor market could reduce the need for immediate monetary tightening.
However, stronger-than-expected employment figures could increase expectations for another Fed rate hike.
ISM Surveys Could Reveal Inflation Pressure
Investors will also monitor the ISM manufacturing and services surveys.
Particular attention will be paid to the prices-paid components, which provide insight into the costs facing U.S. businesses.
Persistent increases in input prices could signal that inflation remains difficult to control.
That would strengthen the case for keeping monetary policy restrictive or potentially raising rates again.
UBS Still Expects the Fed to Hold Rates
Despite the recent increase in rate hike expectations, UBS continues to believe that the Federal Reserve could remain on hold for the rest of 2026.
The bank expects further evidence of cooling inflation to give policymakers enough flexibility to avoid another immediate increase in interest rates.
UBS then sees the possibility of Fed rate cuts during the first half of 2027 if inflation continues to move lower and economic conditions weaken.
UBS Favors Shorter-Duration High-Quality Bonds
Against this backdrop, UBS continues to favor high-quality fixed-income investments with maturities between two and five years.
The bank believes these bonds could allow investors to lock in relatively attractive income while limiting exposure to the higher interest-rate sensitivity associated with longer-duration debt.
For now, upcoming U.S. inflation, employment and business activity data could play a major role in determining whether the Federal Reserve can remain patient or is forced to tighten monetary policy again.
