UBS now expects the Federal Reserve to delay the start of the monetary easing cycle until September, citing ongoing inflation pressures, geopolitical risks, and waning urgency around the labor market.
In a memo, Andrew Dubinski, the American economist at UBS, wrote that the bank "now expects the next interest rate cut from the Fed in September, followed by a second cut in December," which will lead to the federal funds rate reaching around 3.00-3.25% by the end of 2026.
UBS noted that the Fed has set "a higher bar for progress on inflation," emphasizing the need for "clear and convincing evidence that inflation - especially core goods prices - is declining as price pressures linked to tariffs fade."
Dubinski wrote: "Core personal consumption expenditure inflation remains around 3.0% year-on-year, with tariffs accounting for nearly 50-75 basis points, prompting policymakers to wait for these effects to reverse in the data."
The bank also highlighted the inflationary risks associated with rising oil prices linked to Iran, stating that the shock has pushed policymakers to adopt a "watch and wait" stance rather than ignoring energy-driven volatility.
Regarding the labor market, UBS wrote that the Fed "now sees that zero job growth aligns with stable unemployment, reducing the pressure to preemptively cut interest rates."
The economist added that conditions in the second half of 2026 should be more conducive to monetary easing with declining inflation, stable oil effects, and slowing growth towards the overall trend.
UBS warned that the risks surrounding the timing and magnitude of cuts remain two-sided, as either weak inflation progress or slowing growth could change the future trajectory.