UBS has revised its forecast for when the Federal Reserve will begin easing monetary policy, now projecting the first rate cut in March 2027. The bank cites persistently firm underlying inflation and a labor market that remains resilient as reasons for moving the start of the easing cycle later than previously anticipated.
Policy outlook and timing
In commentary accompanying the update, UBS economist Andrew Dubinsky said the bank expects the June Federal Open Market Committee meeting to feature a "removal of the easing bias and a shift in the 2026 dot plot toward no cuts." In UBS's updated path, "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," Dubinsky wrote.
Inflation readings remain mixed
UBS noted that May's consumer price index data came in slightly softer than consensus on the core measure, with core CPI rising 0.21% month-over-month versus a 0.22% consensus. Despite that softer CPI print, the bank cautioned that core PCE tracking remains firmer, at about 0.27% month-over-month, or 3.3% year-over-year. UBS characterized the overall inflation signal as "mixed rather than decisively weaker."
Goods disinflation and tariffs
A constructive development for inflation was the re-emergence of core goods disinflation. UBS said this provides "clear evidence that tariff pass-through effects are beginning to fade." The bank quantified the potential impact of tariff-related price pressure, projecting that tariff-related inflation could reduce inflation trends by 0.8 percentage points over the next year.
Ongoing upside risks
Despite signs of easing in goods inflation, UBS flagged two persistent sources of upside pressure. The first is energy and supply bottlenecks linked to Middle East dynamics. The second stems from AI-driven demand, where UBS said indirect effects remain evident in financial services. These channels are seen as continuing upside risks to inflation.
Conditions for further tightening
UBS reiterated that the bar for additional rate increases remains high. The bank said further hikes would require a reacceleration in economic growth above roughly 2.5%, a steady decline in unemployment, or a sustained increase in inflation expectations.
Near-term growth expectations
Looking ahead, UBS expects softer growth conditions in the second half of 2026, a development the bank believes will ultimately shift Fed attention back toward downside labor-market and growth risks rather than toward additional tightening.
Note: This report reflects UBS's forecasts and the data points cited above as presented in the analysis.