• Julius Baer (BAER.SW) predicts one last 25bp rate hike in December, citing a cooling U.S. labor market and tighter financial conditions.
  • However, the Fed's September statement and projections suggest further tightening may be needed, with inflation still well above target.
  • Market participants are split, with Goldman Sachs (GS) recently shifting its call to December, while Fed Chair Warsh downplays the restrictiveness of current conditions.

Julius Baer's View

Julius Baer, the Zurich-based private bank with CHF 547 billion in assets under management, expects the Federal Reserve to deliver one final 25 basis point rate hike in December before pausing for an extended period. The bank points to a cooling U.S. labor market and sharply tighter financial conditions, driven more by rising long-term Treasury yields and a stronger dollar than by higher short-term rates. According to the bank, December is now seen as the most likely window for the final hike.

The forecast comes amid a heated debate over whether the Fed will need to tighten further to bring inflation down to its 2% target, or whether market-driven increases in borrowing costs will do enough of the work. The Fed's latest Summary of Economic Projections puts 2026 inflation at 3.7%, growth at 2.3%, and year-end unemployment at 4.1%, with inflation not expected to reach 2% until 2029. That suggests the central bank remains far from declaring victory on prices.

A Clouded Labor Market Picture

Julius Baer's assertion of a cooling labor market does not match the Fed's most recent assessment. In its September 16 statement, the Federal Open Market Committee described solid economic growth, resilient spending, and employment gains keeping pace with the workforce, rather than pronounced labor-market cooling. The Fed unanimously raised its policy-rate range by 25 basis points to 3.75%–4.00% at that meeting—its first increase since July 2023.

Still, October 1 brought a shift from Goldman Sachs, which moved its forecast for the next hike to December after softer-than-expected inflation data. That supports the timing in Julius Baer's call, though it does not independently verify the Swiss bank's reasoning. Financial markets have been volatile, with the dollar strengthening and two-year Treasury yields rising sharply immediately after the September decision, while longer-dated yields held relatively steady. That reaction was primarily a repricing of near-term monetary policy rather than a fresh surge in long-term yields.

Fed Officials Push Back

The Fed's own projections show 16 of 18 policymakers expecting at least one additional quarter-point increase by year-end, with the projected rate range at 4.00%–4.25% at the end of both 2026 and 2027. That is broadly consistent with another hike followed by a lengthy pause, but not a guarantee. Fed Chair Kevin Warsh said in September that broad financial conditions were not restrictive, contrasting with the argument that long-term yields and the dollar have already tightened conditions sharply enough to limit further hikes. The disagreement puts the Fed's inflation mandate and its independence from electoral pressure at the center of the debate ahead of the midterm elections, with President Trump continuing to call for much lower interest rates.

For Julius Baer, the rate outlook intersects with its own recovery story. The bank reported first-half 2026 net profit of CHF 673 million, up 128% on a reported basis and 32% against the comparable prior-year result, with a cost-to-income ratio of 62.6%. Assets under management rose 5% from year-end 2025 to CHF 547 billion, but net new client money of CHF 5.7 billion, an annualized growth rate of 2.2%, remains below its medium-term ambitions. CEO Stefan Bollinger is overseeing a turnaround following Signa-related lending problems and a difficult 2025 transition, marked by tighter lending risk appetite and stronger compliance controls. Those controls support resilience but can constrain client inflows.

Implications and Outlook

The most defensible near-term outlook is another possible 25-basis-point hike before year-end, with December supported by Goldman Sachs's October forecast. September Fed projections also support a subsequent extended hold, but neither the meeting date nor the finality of the next hike is assured. Two competing scenarios matter: if inflation eases and employment cools, the case for waiting until December then pausing strengthens. If growth and inflation stay firm, more than one additional hike remains possible.

Principal Asset Management (PFG) strategist Seema Shah argued after September's decision that the debate had shifted from whether rates would rise again to how many increases would follow. Political and international factors are also material. Reuters (TRI) attributed persistent price pressures to import tariffs, an energy shock associated with the U.S.-Israeli war with Iran, and strong AI-related capital investment. A stronger dollar and higher U.S. yields can tighten financing conditions for overseas dollar borrowers and influence global investment flows. For now, treat Julius Baer's "one final hike in December" as a conditional investment-bank view, not an announced Fed timetable.

Correction: An earlier version of this article misstated the Fed's September inflation projection. It is 3.7%, not 3.5%.