UBS Now Predicts Two Fed Rate Hikes in 2026 After Jobs Shock

UBS reversed its no-change forecast to call for September and December Fed hikes, as markets sold off on the strong August jobs report.

Wall Street's rate outlook flipped on Monday after the August employment report blew past forecasts. According to stl.news, UBS revised its outlook and now projects the Federal Reserve will raise interest rates twice during 2026 — once at the September 15-16 meeting and again in December, each potentially 25 basis points. The firm had previously expected no policy changes at all this year. stl.news adds that Citigroup and Macquarie have also reassessed their rate expectations following the stronger labor-market data, according to Reuters. Meanwhile, interest-rate traders have shifted their positioning too: Fortune reports that, per CME's FedWatch, nearly 60% of investors — 58.4% — are now betting on a 25-basis-point hike to 3.75% to 4% at the FOMC meeting this week, with the remainder expecting a hold from Kevin Warsh's central bank.

The report that triggered the shift was itself a shock. stl.news reports that nonfarm payrolls rose by 162,000 in August — nearly three times the roughly 56,000 economists surveyed by Reuters had forecast — while unemployment held at 4.1%. Prior months were revised up too, adding another 55,000 jobs for June and July, and the labor force expanded by roughly 683,000 people with participation rising to 61.6%. But in the classic Wall Street paradox, stocks fell rather than rallied. The S&P 500 declined 0.4% to 7,718.60, the Dow fell 0.5% to 53,414.25, and the Nasdaq slipped 0.3% to 26,506.99, according to stl.news, as traders raised bets on tighter policy. Only small caps bucked the trend, with the Russell 2000 gaining 0.2% to 2,975.65.

The bond market confirmed the hawkish repricing. stl.news reports the two-year Treasury yield, which is especially sensitive to Fed expectations, climbed to approximately 4.37%, while the benchmark 10-year reached roughly 4.78% after the jobs data. The inflation half of the Fed's mandate is not cooperating either: Fortune reports that the latest BLS all-items CPI reading put 12-month inflation at 3.4%, well ahead of the Fed's target, complicating the picture alongside the healthy employment data. Adding pressure, stl.news notes that oil has surged amid US-Iran tensions, with Brent crude around $92.68 and WTI near $91.48 per barrel — energy costs that can feed through into consumer prices and strengthen the case for the Fed to stay restrictive or tighten further.

One of the clearest consequences is in gold, which is refusing to fall despite rising rate expectations. The South China Morning Post reports that gold slipped 0.7% to US$4,444 on Monday after surging nearly 10% in August — its biggest monthly gain since January — and that Wall Street banks remain bullish even with hike odds at 58.4%. RBC Capital Markets forecasts US$4,929 by year-end and US$5,296 in 2027, while Goldman Sachs and State Street Investment Management see US$4,900 and US$5,000 respectively, implying at least a 10% gain from current levels. SCMP quotes State Street strategist Aakash Doshi calling it 'a fiscal spending backdrop that potentially favours gold allocations as a strategic monetary hedge,' as central banks — estimated by the World Gold Council to buy 750 to 900 tonnes this year — hedge against record US government debt of US$40 trillion and multi-decade-high 30-year yields.

The jobs report has reset the September narrative, but the decision is not made. stl.news reports that US markets were closed Monday for the Labor Day holiday, giving investors an extra day to digest the surprise before regular trading resumes Tuesday. The next catalysts are the August Producer Price Index on Thursday, Sept. 10, and the Consumer Price Index on Friday, Sept. 11, ahead of the Federal Reserve's policy meeting on Sept. 15-16. According to stl.news, if inflation comes in hot after the employment surprise, conviction in another rate increase will build; if it improves meaningfully, the Fed gains flexibility. Reuters reported that short-term futures initially priced about a 65% probability of a September hike before easing — so investors must now weigh whether the labor market is strong enough to push rates higher still, rather than simply watching for weakness.