Federal Reserve: Extended pause guidance – UOB

UOB Global Economics & Markets Research notes that the Federal Reserve is widely expected to keep the Federal Funds Target Rate at 3.50%-3.75% at the July FOMC meeting. The bank’s base case is for an extended pause through 2026, with easing only resuming in 2Q and 4Q 2027 as transitory inflation pressures subside. However, it highlights rising risks of further rate hikes given oil and geopolitical developments.

Fed seen on prolonged policy pause

"In line with Bloomberg consensus expectations, the Fed is widely expected to keep the Federal Funds Target Rate (FFTR) unchanged at 3.50%-3.75% at its July meeting."

"With the FOMC remaining divided and ongoing policy reviews being conducted by five task forces, our base case continues to be an extended pause through 2026, before the Fed resumes its easing cycle in 2Q and 4Q 2027 as transitory inflation pressures subside."

"That said, the risk of further rate hikes has increased, with upcoming inflation data and geopolitical developments likely to play a key role in shaping policy expectations."

"OIS swaps continue to price in roughly a one-third probability of a 25bp rate hike at the July 29 FOMC meeting."

"Meanwhile, rates on contracts expiring next year declined by approximately 5bps, reflecting reduced expectations for more than two rate hikes over that period."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)