UBS: Despite Walsh's First Appearance Being Hawkish, the Possibility of a Rate Hike This Year Remains Small

Last week, UBS pointed out in its latest report that although the first FOMC meeting chaired by Federal Reserve Chairman Kevin Walsh sent a clearly hawkish signal, the market's bets on a rate hike this year may be too aggressive.

The bank believes that the market's reaction to Walsh's debut has been significantly overinterpreted, and its core judgment is mainly based on the following three key points:

First, May CPI data shows that the inflationary pressure from tariffs has already reversed in price-sensitive categories, and the inflation trend is expected to decline by about 0.8 percentage points over the next year.

Second, the U.S. economy will face the dual pressure of weakening fiscal support and slowing real income growth in the second half of the year, which will weigh on consumer spending.

Third, Walsh announced the establishment of five internal working groups covering key areas such as communication mechanisms, the balance sheet, and the data framework. This comprehensive review process will significantly slow the pace of major policy adjustments.

UBS expects that the Fed is more likely to keep the federal funds rate unchanged at 3.50%-3.75% for the rest of the year, and a rate-cutting cycle may not begin until 2027.

In terms of asset allocation, UBS advises investors to increase allocations to short- and medium-duration high-quality bonds to lock in current high yields, while maintaining a medium- to long-term bullish view on gold, and believes that interest rates will eventually trend downward.

However, UBS's judgment is clearly at odds with the market's prevailing interest rate pricing. According to the CME FedWatch Tool, the probability of a Fed rate hike in September has risen to about 67%.

What do you think? Is the market overreacting to a rate hike, or is UBS being too optimistic? Leave your thoughts in the comments!

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