Overview
UBS has revised its forecast for the Federal Reserve's next rate move, now projecting that the central bank's initial cut will arrive in September, with a second cut following in December. Under this scenario the federal funds rate would be about 3.00-3.25% by the end of 2026.
Why UBS expects a later start to easing
In its note, UBS highlighted several factors underpinning the delay. First, the bank pointed to sustained inflationary pressure, particularly in core measures, which it says has prompted the Fed to set a higher bar for what constitutes progress. UBS emphasized the need for clear, convincing evidence that inflation - notably core goods prices - is receding as tariff-related price effects unwind.
The firm notes that core PCE inflation remains around 3.0% year-over-year, and that tariffs are contributing roughly 50-75 basis points of that reading. That calibration is a key reason policymakers are expected to wait for the tariff effects to show up as declines in incoming data.
Geopolitical and energy considerations
UBS called attention to the inflationary risks tied to the Iran-related surge in oil prices. The bank reports that this shock has encouraged policymakers to adopt a watch-and-wait stance rather than to look through energy-driven volatility, underscoring the Fed's caution about beginning an easing cycle while such shocks persist.
Labor market and policy posture
On labor dynamics, UBS noted a shift in Fed thinking: zero job growth is now viewed by the central bank as consistent with stable unemployment. That change reduces the imperative to cut rates preemptively on account of labor market pressures.
Outlook and risks
UBS expects conditions in the second half of 2026 to be more favorable for easing, as inflation cools, oil-related effects stabilize, and growth slows toward trend. At the same time, the bank cautioned that risks remain two-sided - either slower-than-expected disinflation or a deterioration in growth could alter the timing and magnitude of rate reductions.
UBS's revised timeline leaves markets and policymakers watching data on inflation, energy prices, and labor conditions closely for signals that would confirm or change the projected path.