UBS sees market pricing of two Fed hikes as too aggressive ... get gold!

UBS's pushback on Fed hike pricing is directly relevant to rates, duration and gold. If the bank's thesis is correct that tariff disinflation is beginning to reassert itself and that softer second-half growth will dampen any hawkish impulse, then current yields on short to medium maturity bonds represent an overshoot that will ultimately correct lower, making the entry point attractive. The five Warsh task forces introduce a structural delay argument that is distinct from the usual data-dependency framing: if the Fed is reviewing its own frameworks simultaneously, the bar for action in either direction rises.

For gold, UBS's medium to long-term constructive view provides a counterweight to Deutsche Bank's more bearish near-term outlook, with the divergence hinging largely on the timing and direction of the eventual Fed pivot. The AI labour displacement risk flagged by UBS, if it materialises at scale, would shift the Fed's reaction function back toward employment protection and away from inflation fighting, a scenario that would accelerate the path to cuts. --- UBS says market pricing of two Fed hikes by April is too aggressive, forecasting an extended hold before cuts in 2027 as tariff disinflation returns and growth softens. Summary: UBS believes the probability of near-term Federal Reserve rate hikes is low, forecasting an extended period on hold before a pivot toward lower rates in 2027, despite markets pricing two hikes by April, according to the bank's note The bank cited emerging core goods disinflation in May CPI data, with tariff pass-through beginning to unwind in price-sensitive categories, and estimated this could reduce inflation trends by around 0.8 percentage points over the next year UBS expects softer US growth conditions to re-emerge in the second half of 2026, driven by diminishing fiscal support and weak real income growth weighing on household consumption, raising the hurdle for additional tightening Fed Chair Warsh's announcement of five task forces covering communications, the balance sheet, data, productivity and labour markets, and inflation frameworks is seen by UBS as likely to delay major policy adjustments and slow implementation, particularly if consensus among policymakers proves elusive UBS said a sustained rise in inflation expectations, growth reaccelerating above 2.5% or a steady decline in the unemployment rate would be needed to materially raise the probability of hikes, and none of those conditions has currently been met The bank recommended adding to short to medium maturity quality bonds at current elevated yields and maintained a constructive medium to long-term outlook on gold, underpinned by its view that the Fed policy rate will ultimately move lower UBS has pushed back against what it describes as overly aggressive market conviction around Federal Reserve rate hikes, arguing that investors have over-interpreted Chair Kevin Warsh's hawkish signals from last week's FOMC meeting and that the most likely policy path remains an extended hold followed by a move toward lower rates in 2027.

Markets are currently pricing two rate hikes from the Fed by April next year, a trajectory UBS regards as inconsistent with the underlying data. The bank pointed to May's consumer price index as evidence that the tariff-driven inflation impulse that had been a meaningful contributor to core price pressures in recent quarters is beginning to reverse. Underlying details in the CPI showed a clear deceleration in tariff-sensitive categories, and UBS estimated the unwinding of tariff pass-through could reduce inflation trends by approximately 0.8 percentage points over the coming year.

That trajectory, combined with a stable labour market that Warsh himself did not present as a primary driver of current price pressures, leaves the Fed without a compelling near-term trigger for tightening. The growth outlook adds further weight to the hold case. UBS expects softer conditions to re-emerge in the second half of 2026, as diminishing fiscal support and weak real income growth bear down on household consumption.

The bank also flagged the potential for AI-driven labour market displacement to shift the Fed's attention back toward downside employment risks, a scenario that would pull the central bank's reaction function away from inflation fighting and toward protection of the labour market. In UBS's framework, three conditions would need to be met simultaneously to raise the probability of additional hikes to a meaningful level: a sustained increase in inflation expectations, growth reaccelerating above 2.5%, and a steady decline in the unemployment rate. None of those conditions is currently in place.

A structural element from last week's FOMC meeting reinforces the case for policy inertia. Warsh's announcement of five internal task forces, covering communications, the balance sheet, data, productivity and labour markets, and inflation frameworks, signals that the Fed is engaged in a broad reassessment of how it conducts and communicates policy. UBS argued that this review process is likely to delay major adjustments as the committee works through its conclusions, with most outcomes expected by year-end.

Any lack of internal consensus could slow implementation further, effectively raising the bar for action in either direction during the review window. Against that backdrop, UBS recommended that investors use current elevated yields to add to short to medium maturity quality bonds, viewing the market's hike pricing as an overshoot that will ultimately unwind. The bank also reaffirmed a constructive medium to long-term outlook on gold, grounded in its expectation that the Fed policy rate will eventually move lower, providing a direct counterpoint to more cautious near-term assessments of the metal from other major banks.

This article was written by Eamonn Sheridan at investinglive.com.