The August US employment report, which came in nearly three times stronger than consensus expectations, is rapidly forcing major Wall Street institutions to rewrite their projections for Federal Reserve policy. On September 7, UBS formally abandoned its previous outlook for the Fed to hold rates steady for all of 2026, pivoting to expectations of quarter-point rate hikes in both September and December, for a cumulative 50 basis points of tightening this year.

Citigroup and Macquarie have also adjusted their rate forecasts in tandem, while market pricing for a September move has now climbed to nearly 60%.

UBS makes a full 180-degree pivot

In its latest report, UBS Global Wealth Management stated clearly that the hawkish signals from Federal Reserve Chair Kevin Warsh at the Jackson Hole symposium, the persistent inflation risks from supply bottlenecks, and the stronger-than-expected August jobs data "are sufficient to alter the previous rate outlook." The numbers show that US nonfarm payrolls increased by 162,000 in August — roughly three times the 55,000 that economists had projected. The unemployment rate also held at 4.1%, while July's figure was revised upward to a gain of 21,000 from an earlier reported decline of 23,000.

UBS noted that this report has removed the "last barrier" of labor market weakness that had been standing in the way of rate increases. The bank's analysis further distinguishes between two possible tightening scenarios: If robust economic momentum is driven by AI-related capital expenditure, productivity gains, and strong corporate earnings growth, then rate hikes could take the form of a relatively benign tightening cycle. However, if inflation remains sticky while growth begins to slow, the situation could devolve into a far less favorable "stagflationary" tightening environment.

Citigroup and Macquarie follow suit with hawkish revisions

Citigroup adopted an even more aggressive adjustment following the jobs release — significantly pushing back its expectations for rate cuts. The bank now forecasts quarter-point reductions in June, September, and December 2027, compared to its earlier prediction of cuts in October, December 2026, and January 2027. Citigroup Chief US Economist Andrew Hollenhorst commented that the report "favors the hawkish camp because it eliminates labor market weakness as an immediate concern."

Meanwhile, Macquarie has moved its baseline expectation for the first rate hike forward from December to September, now anticipating a 25-basis-point increase this month, while maintaining its view of another quarter-point hike in the first quarter of 2027. Deutsche Bank strategist Henry Allen further cautioned that investors may be underestimating the scale of tightening required to contain inflation, pointing out that "the shallow rate hike cycle the market keeps pricing is inconsistent with how the Fed has acted in past tightening campaigns."

Market pricing: September odds rise to 60%, all eyes on CPI for final confirmation

According to the CME FedWatch tool, as of September 8, market probabilities for a 25-basis-point rate hike at the September Fed meeting have climbed to 58%, with a 42% chance of holding rates steady. That marks a notable increase from the sub-50% level seen prior to the release of the August jobs report.

The final piece of the puzzle before the September 16 FOMC meeting will be Friday's release of the August Consumer Price Index report. BofA Securities projects a 0.22% month-over-month increase in core CPI, which it believes "would be sufficient to convince Fed Chair Warsh that inflation is not yet fully under control, thereby supporting another rate hike."

Fed Governor Christopher Waller, however, has indicated that he would lean toward holding borrowing costs unchanged if inflation data improves in the coming weeks, revealing that divisions remain within the committee. But as UBS has pointed out, in the wake of the August payrolls data, the labor market is no longer a variable standing in the way of higher rates — the inflation print will now deliver the final verdict on whether the Fed moves in September.