Central Banks

UBS becomes more bullish on US Fed rate path

Key Points
  • UBS believes that fewer concerns over the softness in inflation within the Federal Reserve and higher oil prices will lead the central bank to increase rates three times in 2018
  • Charles Evans, Chicago's Federal Reserve Bank president, said last week that the central bank should wait until mid-2018 to consider another increase in interest rates
The Marriner S Eccles building of the United States Federal Reserve in Washington, DC, on Jul. 24, 2017.
Smith Collection | Gado | Getty Images

The Swiss bank UBS has updated its call on the number of rate hikes that the U.S. Federal Reserve will announce this year.

UBS believes that fewer concerns over the softness in inflation within the Federal Reserve and higher oil prices will lead the central bank to increase rates three times in 2018. It had previously estimated two rate hikes.

"We are changing our Fed call for 2018 and 2019, projecting three hikes in 2018 and two hikes in 2019. We see the Fed hiking at the March, June and December meetings this year, and at the June and December meetings next year," a team of UBS economists said in a note on Wednesday.

"We had originally thought that the Fed would skip a hike at the March meeting because the softness in inflation in 2017 had created a debate inside the Committee."

However, minutes from the December meeting showed a lesser degree of internal debate over inflation, the bank said.

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At the same time, oil prices have risen over the last few months, trading currently at around $65 a barrel.

"The headline inflation could receive a modest boost and the Committee will likely see that outcome as supporting inflation expectations," the bank said.

At the start of the month, Reuters reported that traders were expecting two rate increases in 2018.

Karen Ward, chief market strategist for the U.K. and Europe at J.P. Morgan Asset Management, told CNBC via email that much of the Fed's policy will be influenced by what other central banks decide.

"If the European Central Bank (ECB) and Bank of Japan (BoJ) were to get more bullish this year we may see longer-term rates rise more, which might limit the ambitions of the Fed," she said. "But given we think both the ECB and BoJ will continue to be plagued by low inflation that will in turn give the Fed scope to tighten by at least a further 75 basis points this year."

However, Charles Evans, Chicago's Federal Reserve Bank president, said last week that the central bank should wait until mid-2018 to consider another increase in interest rates.

Evans, who voted against the last rate increase decision, believes that the tax cuts and a strong labor market aren't enough to drive inflation to the central bank's target at least until late 2019, Reuters reported.

The minutes from the December meeting showed a division among central bankers about their plan for 2018. Six of the 16 officials said in December that the Fed would raise rates three times in 2018, but six others pointed out that there would be two hikes or fewer.