UBS Group strategists predict that the Federal Reserve is likely to raise interest rates to 6.5% next year, citing strong economic growth in the U.S. and persistent inflation. While their base case originally called for two rate cuts this year, recent data showing unexpected strength in the economy has led to a shift in expectations towards rate hikes.
The strategists believe that if inflation remains at 2.5% or higher, the Federal Open Market Committee could resume raising rates early next year, potentially reaching 6.5% by the middle of next year. This scenario would mark a significant departure from the previous expectation of rate cuts.
Major banks like UBS are adjusting to the possibility of a prolonged hiking cycle, with UBS moderating their earlier stance on rate cuts. The so-called “no landing scenario” of further rate hikes could result in a sharp flattening of the US Treasury curve, higher benchmark yields, and a drop in stock prices.
Overall, investors are starting to express concerns about an overheated economy, which could lead to government bond sell-offs and wider credit spreads. The implications of a high inflation scenario could result in significant market turbulence.
The UBS strategists’ forecast underscores the uncertainty facing financial markets as they grapple with the potential for a more aggressive tightening cycle by the Fed. Stay tuned for more updates on this developing story.
Translated by Paulina Steffens.
Original Note: Fed Hiking Rates to 6.5% Is ‘Real Risk’ for UBS Strategists
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