UBS Sees Two Fed Rate Hikes in 2026; Asset Picks

UBS now expects the Federal Reserve to raise interest rates twice in 2026, forecasting 25-basis-point increases at the September and December meetings. The bank reversed an earlier call for no policy changes following stronger-than-expected August jobs data and hawkish Fed commentary.

US payrolls rose by 162,000 in August, above forecasts near 55,000, while the unemployment rate held at 4.1%. That was the largest monthly gain since March. Market odds for a 25-basis-point increase at the Fed’s September 15-16 meeting rose to about 60.4%, from 59.4% a day earlier.

UBS pointed to the stronger labor market, hawkish remarks at the Jackson Hole symposium, and growing inflation risks linked to supply bottlenecks as reasons for the change in its forecast.

The bank warned that the investment impact depends on why the Fed tightens policy. “A Fed responding to US economic strength is very different from a Fed responding to inflation problems,” UBS strategists wrote.

On equities, UBS remained constructive globally while noting potential short-term volatility from rising yields. The bank favors sectors tied to artificial intelligence, power and resources, and longevity themes, saying these areas should benefit from sustained capital spending and broader earnings growth.

In fixed income, UBS removed its recommendation to lock in yields in short- to medium-duration bonds as an alternative to holding cash. After recent yield increases, the bank sees opportunities in medium- to longer-duration government bonds if tighter policy strengthens confidence in the Fed’s inflation fight, reduces longer-term inflation expectations, or cools growth.

UBS noted a more hawkish Fed could support the US dollar if the policy gap with other central banks widens. Higher real interest rates and a stronger dollar could weigh on gold in the near term. The bank added that it views gold as a portfolio hedge and diversifier rather than a tactical play on the next Fed decision.

The bank emphasized that the path of the economy and inflation will matter more for portfolios than the outcome of a single Fed meeting. It said investment recommendations will be adjusted depending on whether future rate moves reflect stronger activity or persistent inflation, and that flexibility will be required as incoming data and Fed guidance evolve.