As the US Federal Reserve’s rhetoric is becomes increasingly hawkish, markets may need to prepare for the potential of higher interest rates. How are private banks positioning their house views for such a scenario?
The US Federal Reserve has become increasingly hawkish in recent weeks with Fed chair Kevin Warsh noting that if the inflation target is not reached – 2% over the long run – higher interest rates will be the likely policy response.
“Here is my standard: We must be confident that underlying inflation is moving to our objective, clearly and at sufficient speed. Otherwise, we have work to do. That’s our job,” Warsh said during the Jackson Hole speech on August 28.
Most common base case: Rates on hold
Despite the shift in the Fed’s tone, many private banks expect limited to no change in the interest rate policy.
UBS believes the Fed could potentially keep rates on hold given its base case of 2% US growth in 2026 and gradually easing inflation. Julius Baer echoes the view, though it acknowledges that the probability of a hike has risen considerably. Standard Chartered and HSBC Private Bank forecasts that the 3.50-3.75% Fed funds rate will remain through 2026 and 2027.
Even those with more hawkish views, such as Lombard Odier, only expect one rate hike in September.
Scenarios for multiple hikes
Nonetheless, UBS still explored potential scenarios where multiple hikes could occur.
One scenario is that the US economy grows at an above-trend rate of 2.5-3.0% in both 2026 and 2027, with an “AI liftoff”, and inflation stays above target, resulting in up to three interest rate hikes. Another scenario is that the Fed could hike rates twice in response to sticky inflation and muted growth.
Equities: Positive outlook unaffected by Fed stance
On equities, private banks are broadly retaining their existing views despite increased hawkishness.
Standard Chartered said that any defensive rate hike is likely to be neutral for equities, advising investors to buy on dips on seasonal or pre-election volatility amid a robust earnings outlook.
HSBC Private Bank also said its constructive medium-term equity view is unchanged as US economic activity remains resilient and earnings momentum continues to broaden across sectors and geographies. It continues to hold an overweight position on US equities, favouring structural growth areas including AI monetisation and infrastructure, re-industrialisation, electricity investment and security.
Fixed income: Reduced attractiveness
On fixed income, the view has been less optimistic.
At UBS, the bank no longer recommends investors to lock in yields in short to medium-duration bonds as an alternative to cash, as the relative advantage could narrow if the Fed moves onto a hiking path.
“On the fixed income side, I have to say it’s been a challenging asset class over the last year or so. We’ve seen this ticking up of bond yields across the curve, but particularly the long end, which have really negatively impacted performance,” said Lombard Odier’s Asia CIO, John Woods. “If you look at the year-to-date total return of investment grade and high yield, it’s been uninspiring, to say the least.”
