UBS now expects a third Fed rate hike after hot September inflation print

Investing.com -- In a new note to clients, UBS revised its Federal Reserve outlook to include a third interest rate hike in March 2027, after September inflation data came in hotter than expected.

On Wednesday, it was revealed that headline consumer prices rose 0.65% month over month and 3.7% year over year, while core CPI increased 0.33% and 2.6%. Core inflation was well above the 0.2% consensus for a second consecutive month.

Energy drove much of the headline acceleration, with gasoline prices up roughly 9.5% on Middle East supply concerns, contributing nearly 40 basis points of the 65 basis point monthly gain. Higher jet fuel costs pushed airfare inflation up 1.2%.

However, UBS’s U.S. economist Andrew Dubinsky said the details showed broader firmness. Core goods inflation rose 0.25%, more than triple its three-month average, with information technology pricing accelerating 91 basis points.

He attributed that to supply constraints and AI-related demand across parts of the electronics sector. Vehicle prices also moved higher.

Core services inflation strengthened to 0.37%, driven by travel categories, with hotel prices up more than 2%.

“The September report was a hawkish surprise: Much of the headline strength reflected energy, but the simultaneous acceleration in core goods and core services should keep the Fed focused on inflation risks and reinforce higher-for-longer policy expectations,” Dubinsky wrote.

UBS now expects three hikes in total, following moves in September and December 2026, then a hold until late 2027. It said back-to-back upside surprises make an October hike a close call, but recent Fed communication signals a preference for gradual tightening.

The bank’s path remains more dovish than markets, which price in nearly five hikes in total.

Original Article

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