UBS extends Fed tightening cycle forecast with March rate hike after inflation surprise

Oct 15 (Reuters) - UBS Global Wealth Management expects the Federal Reserve to raise interest rates for a third time in March 2027, extending its tightening cycle into next year after stronger-than-expected September inflation underscored broadening price pressures.

The Fed raised rates by 25 basis points in September, its first increase since 2023, and UBS expects another quarter-point hike in December.

• "The combination of stronger goods inflation with strong services inflation supports a higher-for-longer Fed outlook," UBS economist Andrew Dubinsky said in a note on Wednesday.

• With inflation pressures proving more persistent than expected, central banks globally have signaled they are prepared to keep monetary policy restrictive for longer.

• UBS added that risks from AI-driven demand, Middle East-related supply disruptions and trade policy uncertainty could keep the Fed biased toward tighter policy for longer.

• "The longer tightening cycle is designed to ensure inflation expectations stay anchored while inflation remains near 3% due to overlapping shocks," UBS said.

• The Fed is scheduled to meet on October 27-28.

• Interest-rate futures are pricing in a roughly 27% probability of a rate hike at the October meeting, up from 21.6% before the CPI report, and an 89.5% chance of an increase in December, according to CME's FedWatch data.

(Reporting by Rashika Singh in Bengaluru; Editing by Sonia Cheema)