Stocks will remain volatile as investors got ahead of themselves pricing in a soft landing with 100 basis points of Fed tightening still to come, UBS say

The Federal Reserve is unlikely to pause rate hikes until it sees a significant improvement in the inflation gauge, according to a report.

Equity investors may have gotten ahead of themselves by pricing in a soft landing for the US economy, according to a note by Mark Haefele. US stocks fell Tuesday, a day after the equity market had its worst day in two months.

"We expect equity markets to remain volatile as investor sentiment fluctuates between hopes that the Fed will succeed in steering the US economy to a soft landing and fears that it will not," said Haefele

After a bear-market rally started in June, stocks have been paring gains. The firm said that the jump was due to an easing in inflation and a strong jobs report. The Fed's monetary policy stance got a boost when inflation fell to 8.5%.

The Swiss wealth management firm said that optimism is waning. The Fed's aim of keeping financial conditions restrictive to slow growth and cool the economy should be maintained because inflation and the labor market are too high.

The minimum requirement to support a pause in the Fed's hiking cycle is three months of core PCE. In June, the Core Personal Consumption Expenditure Price index was up 0.6% on a monthly basis.

"We maintain our view that the Fed will raise rates by another 100 basis points by the end of the year, with risks of more hikes if inflation does not slow in line with our forecasts," the bank said.

The Federal Open Market Committee has raised the Fed funds rate four times this year and is expected to raise it again in September. The annual meeting of the central bank will be held in Jackson Hole on Friday.