SKN | UBS Says Sticky Inflation Is Delaying Federal Reserve Rate Cuts

UBS Sees Inflation Keeping the Fed on Hold

UBS believes the Federal Reserve is not yet ready to begin cutting interest rates as persistent inflation pressures continue outweighing arguments for near-term monetary easing.

According to UBS, inflation remains the dominant policy concern for the Federal Reserve despite growing market speculation surrounding future rate cuts.

The bank now expects the Fed’s first rate reduction to arrive in December 2026, followed by another cut in March 2027, eventually bringing the federal funds rate into a range of approximately 3.00% to 3.25% by early 2027.

Core Inflation Remains Stubborn

UBS pointed to continued strength in core personal consumption expenditure inflation, particularly within goods and technology-linked categories.

The bank noted that April core PCE goods inflation is tracking near 0.3% month over month, reflecting ongoing pricing pressure despite moderation in some tariff-sensitive segments.

At the same time, AI-related software pricing has emerged as a new inflationary force, with UBS highlighting rapid increases in software costs tied to artificial intelligence demand.

These pricing trends suggest inflationary pressure is broadening beyond traditional goods categories and becoming more embedded across certain areas of the economy.

Supply Chain Pressures Re-Emerge

UBS also emphasized rising global supply-chain pressures as another factor limiting the Federal Reserve’s flexibility.

The New York Fed’s Global Supply Chain Pressure Index has reportedly moved higher again, approaching levels last seen during the supply disruptions of early 2022.

Renewed logistical and geopolitical uncertainty, particularly tied to developments surrounding the Strait of Hormuz and global trade flows, continues influencing commodity markets and broader inflation expectations.

The combination of supply constraints and elevated energy risks remains a major concern for policymakers.

Economic Growth Still Resilient

Another reason UBS believes the Fed can afford to remain patient is the continued resilience of the U.S. economy.

Private domestic final sales growth remained solid during the first quarter, while unemployment levels have stayed relatively stable despite higher borrowing costs.

This economic stability reduces pressure on the Federal Reserve to quickly stimulate growth through lower interest rates.

Instead, policymakers appear focused on ensuring inflation continues moving sustainably toward long-term targets before shifting toward a more accommodative stance.

Fed Still Expected to Cut Eventually

Although some investors have begun discussing the possibility of additional rate hikes, UBS believes the threshold for renewed tightening remains high.

The bank continues to view eventual rate cuts as the most likely next move from the Federal Reserve once inflation conditions improve.

UBS also referenced comments from Federal Reserve Governor Christopher Waller suggesting that easing geopolitical supply shocks — particularly around the Strait of Hormuz — would significantly improve the Fed’s ability to look through temporary inflation pressures.

This indicates policymakers may remain highly sensitive to external energy and trade disruptions before making major policy adjustments.

Market Focus Turns to Inflation Data

Investors are now expected to closely monitor upcoming inflation readings, labor market conditions, and supply-chain developments for clues regarding the timing of future Federal Reserve policy changes.

Financial markets continue balancing optimism surrounding eventual rate cuts against concerns that inflation could remain elevated longer than previously expected.

The Federal Reserve’s path forward increasingly appears tied not only to domestic economic performance but also to geopolitical developments and structural pricing pressures linked to artificial intelligence and global trade dynamics.

Outlook

Looking ahead, UBS expects the Federal Reserve to maintain a cautious policy stance throughout much of 2026 unless inflation moderates more decisively.

Sticky core inflation, resilient economic growth, and renewed supply-chain stress continue reducing the urgency for immediate easing.

While markets still anticipate eventual rate cuts, UBS suggests the Federal Reserve remains firmly focused on inflation control before pivoting toward a looser monetary policy environment.