UBS: Fed may return to rate hike

The combination of strong U.S. growth and sticky inflation increases the likelihood that the Fed will raise interest rates rather than cut them, according to strategists at UBS Group AG. The combination of strong U.S. growth and sticky inflation increases the likelihood that the Fed will raise interest rates rather than cut them, pushing borrowing costs up to 6.5% next year, according to strategists at UBS Group AG. While the bank’s baseline scenario is for two rate cuts this year, UBS now sees a growing chance that inflation will fall short of the Fed’s target, prompting a return to rate hikes and a deep sell-off in bonds and stocks. Markets scaled back expectations for policy easing after recent U.S. data showed surprising strength in the world’s largest economy. “If expansion remains resilient and inflation remains stuck at 2.5% or higher, there is a real risk that the FOMC will resume raising rates early next year and reach 6.5% Fed Funds by the middle of next year,” UBS strategists including Jonathan Pingle and Bhanu Baweja wrote in an investor note. UBS has already softened its aggressive view of a 275 basis point U.S. rate cut this year, now predicting only 50 basis points.