Why we don’t think the Fed will hike rates
At a Glance
The desk believes the Federal Reserve is unlikely to hike rates based on the diverging perspectives within the FOMC and a favorable inflation outlook over the next year. Per the full note by James Knightley, the Fed's dual mandate of maximizing employment and maintaining price stability requires a cautious approach, especially given the current softness in job creation and the housing market. Despite a hawkish tone from half of the FOMC members, the remaining members' skepticism coupled with improving inflation metrics supports our stance for a lengthy pause in rate hikes. The consensus within the market is significantly swayed by these internal dynamics as investors currently anticipate a 25 basis point hike by October 2026 but our position emerges firmly on the side of inaction.
Key Takeaways
- 01Fed unlikely to hike rates amidst soft jobs data and shifting inflation outlook.
- 02Half of the FOMC suggests a cautious approach, supporting the desk's view.
- 03Current market pricing favors a hike by October but the desk argues for a prolonged hold on rates.
- 04Inaction is preferred given the dual mandate of employment and inflation management.
Full Analysis
What the desk is arguing
The desk asserts that the Fed will not hike rates, as the labor market remains fragile and inflation is expected to improve. Citing the internal divisions within the FOMC highlighted by Knightley, where half of the committee members express doubts over the need for further tightening, we plan for a prolonged period of stable rates.
Recent job growth averages, which reflect only modest increases, echo hesitance among Fed officials about any immediate hikes. Non-farm payroll growth from January 2025 to February 2026 averaged just 8,500, despite a recent uptick to 188,000 per month, illustrating this uncertainty surrounding labor market robustness.
The alternative read would suggest an imminent hike based on recent inflation quantifications, but our analysis emphasizes the nuanced economic conditions that the Fed uniquely navigates compared to its global counterparts, which tend to focus singularly on inflation targets.
Where it sits in our coverage
Our current consensus target for the USD is 1.075, with notable forecasts including: - jpmorgan: 1.10 by March 2026 - bofa: 1.04 by March 2026
This position aligns closely with the outlook from jpmorgan, who shares a similar bullish stance on USD strength while diverging from bofa, which anticipates a pullback. Our stance on rate stability positions us at the upper bound of the observed spread.
How other firms see it
Firms like jpmorgan and others appear to align with our thesis, believing in the Fed's hold on rates amidst economic caution. Conversely, bofa stands in opposition, emphasizing a likely need for tightening based on varying inflationary pressures.
As the Fed's decisions unfold, the trajectory of USD and potential implications on related currency pairs such as USD/JPY will be critical to monitor for shifts in sentiment and policy impact.
What the calendar says
With no upcoming calendar events that could impose immediate volatility on the market, the focus remains on reaffirming the Fed's current stance as economic indicators roll out. This stability allows traders to assess the macroeconomic environment without the proximate influence of scheduled market-moving events.
Market Implications
Traders should remain alert for shifts in the inflation narrative, aiming to gauge market positioning around the 1.075 level. Additionally, watching how USD/JPY reacts to potential rhetoric from Fed officials can signal sentiment changes in response to labor market updates.
From the original
Opinions Opinion by James Knightley Why we don’t think the Fed will hike rates 07:05 Rates United States A more hawkish-than-anticipated FOMC meeting fuelled market expectations of a Fed rate hike. But the inflation backdrop should improve markedly over the next 12 months, and th
Related speeches
4 itemsFOMC preview: Fed to stay on hold after June’s hawkish shift
The desk anticipates that the Federal Reserve will maintain its current policy stance during the upcoming FOMC meeting on July 28-29, 2026, refraining from rate hikes despite elevated market expectations fueled by rising oil prices. Per the full note from ING, softened inflation and labor market data have diminished the urgency for action, leading to a shift in market sentiment from roughly 80% likelihood of a rate increase to no hikes being priced in. Key indicators such as the June CPI at 0.1% versus expectations of 0.4% and disappointing non-farm payroll growth of just 57,000 underscore this cautious outlook. As seen in our internal research, the consensus target for EUR/USD reflects a level of 1.16, aligning with the Fed's cautious tone.
UBS On-Air: Paul Donovan Daily Audio 'The Fed will cut, stay unchanged, or raise rates'
Per the full note [source], the Fed minutes revealed a surprisingly broad range of views, including explicit mention of rate hikes, which markets had not priced. The desk highlights that this hawkish tilt reduces the probability of near-term cuts, but the overarching caveat—dependent on inflation persistence—preserves optionality. With two-year yields edging higher and the labour market deemed stable by most members, the near-term path is data-dependent rather than directionally clear.