Strong Non-Farm Payrolls Ignite Hawkish Expectations on Wall Street! UBS Joins the Hawkish Camp: Switches from "No Rate Changes All Year" to Forecasting 25 Basis Point Hikes in September and December

According to information from Zhitong Finance APP, the stronger-than-expected August US non-farm employment data—almost three times market expectations—is forcing major Wall Street institutions to urgently rewrite their scripts for the Federal Reserve’s policy path. On September 7, UBS officially abandoned its previous forecast of “no hikes throughout 2026,” and now expects the Federal Reserve to raise rates by 25 basis points each in September and December, for a total increase of 50 basis points this year. Citigroup and Macquarie also simultaneously adjusted their rate forecasts, with global financial markets now pricing in a nearly 60% chance of a September rate hike.

UBS Makes a 180-Degree Turn: From “No Action All Year” to “Two Rate Hikes Before Year-End”

UBS Global Wealth Management stated clearly in its latest report that the hawkish signals sent by Federal Reserve Chairman Kevin Walsh at the Jackson Hole Symposium, persistent inflation risks from supply chain bottlenecks, and the strong August non-farm employment data “are now sufficient to alter previous interest rate expectations.”

Data shows US non-farm payrolls increased by 162,000 in August, nearly three times the expected 55,000. The unemployment rate remained low at 4.1%, and the July figure was revised up from a previously reported reduction of 23,000 to an increase of 21,000. UBS noted that this report removed the “last barrier” of labor market weakness as an obstacle to rate hikes.

UBS further differentiated between two rate hike scenarios in the report: if AI-driven capital expenditure, productivity improvements, and corporate profit growth keep the US economy robust, rate hikes could be a relatively “benign” tightening; but if inflation remains sticky and economic growth starts to slow, it could evolve into a more unfavorable “stagflationary” tightening.

Citigroup and Macquarie Turn Hawkish in Unison: Rate Cuts Delayed, Rate Hikes Pulled Forward

Following the employment data release, Citigroup made a more aggressive adjustment—significantly delaying its forecasts for rate cuts. It now expects the Federal Reserve to cut rates by 25 basis points each in June, September, and December 2027, compared to its previous projections of October and December 2026 and January 2027. Citigroup chief US economist Andrew Hollenhorst said the report “favors the Fed’s hawkish stance because it eliminates labor market weakness as an immediate concern.”

Macquarie has advanced its baseline expectation for the first rate hike from December to September, expecting the Federal Reserve to raise rates by 25 basis points in September and maintain its view of another 25 basis point hike in the first quarter of 2027.

Deutsche Bank strategist Henry Allen further cautioned that investors may be underestimating the scale of rate hikes needed to contain inflation—“the shallow rate hike cycle the market continues to price in is inconsistent with the Federal Reserve’s previous cycles.”

Market Pricing: Probability of a September Rate Hike Rises to 60%, Awaiting the CPI ‘Final Hammer’

The CME “FedWatch” tool shows that as of September 8, the market-implied probability of a 25 basis point Fed rate hike in September has risen to 58%, with a 42% probability of no change. This is a clear increase from less than 50% before the August non-farm data was released.

However, the last piece of the puzzle ahead of the September 16 FOMC meeting will be the August Consumer Price Index (CPI) report, to be released this Friday. BofA Securities expects August core CPI to rise 0.22% month-on-month, believing “this is enough to convince Fed Chairman Walsh that inflation is not yet fully controlled, therefore supporting another hike.”

Federal Reserve Governor Waller said that if inflation data improves in the coming weeks, he tends to keep borrowing costs unchanged, indicating ongoing committee disagreements. But as UBS pointed out, in the face of strong August non-farm data, the labor market is no longer an obstacle to hikes—now, inflation data will be the “final hammer” in deciding whether the Fed hikes in September.