Mitsubishi UFJ Expects a 25-Basis-Point Fed Hike This Month, Then No Change in October

Mitsubishi UFJ has dropped its forecast that the Federal Reserve would keep rates unchanged this year and now expects the central bank to raise rates by 25 basis points in September. According to Sina Finance, strategists George Goncalves and Agron Nicaj cited Fed Chair Kevin Warsh's hawkish remarks at Jackson Hole, solid August employment data, and Friday's hotter-than-expected CPI. The strategists wrote that a rate hike could amount to a "policy mistake," but said the Fed would find it difficult to stand pat when markets already expect a hike next week. They also said that if Warsh repeatedly stresses that "inflation is one of the options" and does nothing, it would create problems. Mitsubishi UFJ expects the Fed to leave rates unchanged in October after the September hike, saying officials are unlikely to signal an aggressive push into the tightening cycle before the midterm elections. The strategists put the probability of another rate hike in December at 55% to 60%. They also raised their yield forecasts for most maturities of U.S. Treasuries by 25 to 50 basis points. They now expect year-end yields of 4.25% for the two-year Treasury, 4.625% for the 10-year, and 5% for the 30-year. The strategists still said U.S. Treasuries could have room to rise if economic growth weakens in 2027, inflation cools, or fiscal consolidation expectations increase.