Investing.com -- UBS has pushed back its Federal Reserve easing forecast to March 2027, citing still-firm underlying inflation and a resilient labor market that point toward a more hawkish near-term policy adjustment.

Economist Andrew Dubinsky said UBS expects the June FOMC meeting to include "removal of the easing bias and a shift in the 2026 dot plot toward no cuts," with the start of the easing cycle now delayed from prior expectations.

“We now expect the Fed to begin its easing cycle in March 2027, followed by a second rate cut in June 2027, with the policy rate ultimately moving toward a 3.00-3.25% range,” wrote Dubinsky.

May's CPI report was said to be softer than expected, with core CPI rising 0.21% month-over-month versus a 0.22% consensus estimate.

However, UBS cautioned that core PCE tracking remains firmer at approximately 0.27% month-over-month, or 3.3% year-over-year, leaving the overall inflation signal "mixed rather than decisively weaker."

A notable positive was the re-emergence of core goods disinflation, which UBS said provides "clear evidence that tariff pass-through effects are beginning to fade." The bank projected tariff-related inflation could reduce inflation trends by 0.8 percentage points over the next year.

However, UBS identified two ongoing sources of upside inflation risk. Energy and supply bottlenecks linked to Middle East dynamics and AI-driven demand, where indirect effects remain evident in financial services.

On rate hikes, UBS said the hurdle remains high, requiring a reacceleration in growth above roughly 2.5%, a steady unemployment decline, or a sustained rise in inflation expectations.

Softer growth conditions in the second half of 2026 are expected to eventually shift the Fed's focus back toward downside labor and growth risks.