In a notable shift, Mitsubishi UFJ Financial Group has abandoned its earlier projection that the Federal Reserve would hold interest rates steady for the rest of the year, now anticipating a 25-basis-point increase at the upcoming September meeting.

Strategists George Goncalves and Agron Nicaj adjusted their forecast based on a confluence of factors, including hawkish remarks from Fed Chair Warsh at the Jackson Hole symposium, robust August employment figures, and Friday's Consumer Price Index reading that surpassed expectations.

The strategists acknowledged that a rate increase could potentially be viewed as a "policy misstep," yet they argue that with markets already pricing in a move next week, the Fed would face significant difficulty in choosing to remain on the sidelines. They noted that given Warsh's repeated emphasis that "inflation is one of the options," failing to act would create complications for the central bank's credibility.

Following the anticipated September hike, Mitsubishi UFJ projects the Fed will maintain rates in October, believing officials are unlikely to signal an aggressive tightening trajectory so close to the midterm elections.

Looking ahead, the strategists estimate a 55% to 60% probability of another rate increase in December. They have also revised their yield forecasts upward by 25 to 50 basis points across most Treasury maturities, now projecting the two-year yield to reach 4.25%, the ten-year to hit 4.625%, and the thirty-year to climb to 5% by year-end.

Despite these adjustments, the strategists maintain that Treasuries still possess upside potential should economic growth weaken, inflation cool by 2027, or fiscal consolidation efforts gain momentum.