Inflation and Jobs Data Tilt the Fed More Hawkish in the Near Term

UBS anticipates the Federal Reserve will adopt a more hawkish tone in the near term, delaying rate cuts to March 2027 due to persistent underlying inflation and resilient labor markets. While tariff-related goods disinflation is emerging, upside risks from energy and AI-driven demand keep the policy outlook firm.

Key Takeaways

• 1.The Fed is expected to turn more hawkish in the near term, likely removing the easing bias and delaying the start of the easing cycle to March 2027.
• 2.Goods disinflation is re-emerging as tariff pass-through effects begin to fade, though services inflation remains relatively firm.
• 3.While tariff pressures are easing, energy, geopolitical developments, and AI-related demand continue to pose upside risks to inflation.

Table of Contents

• Inflation and jobs data tilt the Fed more hawkish in the near term
• May CPI: modest downside surprise, but PCE still firm
• Goods disinflation signals fading tariff effects
• Services disinflation paused
• Pulse check on three sources of upside inflation risk: one improving, two ongoing
• Fed outlook: hawkish recalibration in the near term
• Why hikes remain unlikely
• Policy path: delayed easing, eventual pivot

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