Federal Reserve: Fed holds rates and supports Dollar – HSBC

HSBC’s Jose Rasco and Michael Zervos note that the US Federal Reserve (Fed) kept rates unchanged for a fifth straight meeting, with a 9-3 split highlighting internal debate. Their base case is for the federal funds rate to stay at 3.50%-3.75% through 2026 and 2027, as core Personal Consumption Expenditures (PCE) Price Index inflation is seen stable, supporting a positive stance on the US Dollar (USD).

Resilient outlook

"The US Fed Reserve left interest rates unchanged for a fifth consecutive meeting, in line with expectations, but the 9-3 vote revealed a lively debate within the FOMC."

"Despite the dissents, our base case remains for the FOMC to maintain the federal funds target range at 3.50%-3.75% through both 2026 and 2027 as we believe core PCE inflation will remain stable."

"Fed Chair Kevin Warsh delivered a constructive assessment of the US economy, highlighting resilient growth, a balanced labour market and accelerating AI-driven investment, while reiterating the Fed’s unwavering commitment to returning inflation to its 2% target."

"We remain overweight on US equities, supported by resilient economic growth, broadening earnings and continued AI leadership, and continue to emphasise diversification across the AI ecosystem. We also expect policy uncertainty and evolving trade developments to create opportunities for active portfolio positioning."

"In fixed income, we maintain a neutral duration stance and favour high-quality investment grade credit to capture attractive yields and coupon income. We remain positive on the US dollar, supported by resilient US economic fundamentals and relatively attractive interest rate differentials."

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