UBS House View Daily

Thought of the day

15.09 - Will the Fed hike rates again this year?

After August’s 1.7% print, US core consumer price inflation has now been stuck at the same annual rate for four months. Persistent lower-than-target inflation has prompted concern among some dovish Federal Reserve FOMC members that inflation expectations may be moving lower, warranting a slower pace of rate increases. But there are signs that inflation is creeping back, which we expect will prompt the Federal Reserve (Fed) to raise rates in December:

  • While the annual rate is flat, core inflation rose 0.2% on a monthly basis in August, and over the past three months has risen at a 1.9% annualized pace.
  • Headline inflation is back. After five consecutive months of weaker-than-expected headline CPI, August’s higher-than-consensus 0.4% increase was the largest monthly jump since January and lifted the annualized rate to 1.9% from 1.7%.
  • Inflation doesn’t have to be at the Fed’s 2% target for the central bank to hike. Weak inflation didn’t deter the Fed from raising rates in June, and if inflation is making progress towards 2% the central bank may well act.

So we expect the market to start pricing in a higher trajectory of Fed rate hikes than the current two 25 basis point hikes in three years. This adjustment looks to have already started. The probability of a December hike has increased to 51%, up from 31% a week ago and two-year yields have risen by 11 basis points in the last week to 1.37%. We are underweight two-year Treasuries and expect yields to increase to 1.8% over six months.

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