Will U.S. data allow the Fed to remain patient?

Investing.com -- UBS said a run of U.S. economic data in the week ahead will test whether inflation and employment are cooling enough for the Federal Reserve to keep interest rates on hold.

Markets raised the implied probability of a rate rise at the Sept. 15-16 meeting to about 60%, from roughly 40%, after Fed Chair Kevin Warsh’s Jackson Hole remarks.

Warsh said policymakers must be confident that underlying inflation is moving toward the 2% target "clearly and at sufficient speed. Otherwise, we have work to do," the bank noted.

The comments followed July PCE data that came in above expectations, rising 0.2% on the month and 3.7% from a year earlier. Some measures were more encouraging, UBS said, with market-core PCE slowing to 2.26% on a three-month annualized basis.

Friday’s August employment report will be the main focus. Payroll growth is forecast to rebound only modestly to 45,000 after private payrolls fell 23,000 in July, while the unemployment rate is seen rising to 4.2% from 4.1%.

The ISM manufacturing and services surveys provide a second test, with prices-paid components watched for persistent cost pressures.

Despite the increased hike risk, UBS said its base case remains that further evidence of cooling inflation will allow the Fed to hold this year, before potential cuts in the first half of 2027.

The bank continues to favor high-quality bonds with maturities of two to five years to lock in income.

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