Fed holds rates steady as three FOMC members dissent
The Federal Reserve's recent decision to hold interest rates steady, despite dissent from three FOMC members, highlights ongoing uncertainties in the U.S. economy. Markets had anticipated a potential rate hike, pricing in a one-third chance of a 25bp increase; however, the Fed opted for caution ahead of further employment and inflation data, with current rates maintained at 3.5-3.75%. Per the full note , the implication is a more extended period of steady policy, projecting a likelihood of rates remaining unchanged into 2027. This decision has prompted slight softening in the dollar and shifts in the yield curve.
What the desk is arguing
The decision to maintain interest rates indicates the Fed's desire for more data before committing to further tightening. As noted in the commentary, the dissent from influential members such as Hammack, Kashkari, and Logan underscores a growing schism within the committee about the appropriate response to persistent inflationary pressures.
Market reaction shows a mixed response, with two-year yields declining while ten-year yields edged up, reflecting uncertainty about future monetary policy. The reduction in futures pricing for cumulative rate hikes suggests a market recalibrating its expectations for a more dovish Fed stance.
Where it sits in our coverage
Our internal coverage for the EUR/USD pair reveals a consensus target of 1.1525 for December 2026, with ranges from 1.1200 to 1.2000. Notably, firms such as Goldman and Morgan Stanley are projecting targets at the upper end of this range, indicating a more bullish outlook amidst the Fed's cautious stance on rate hikes.
How other firms see it
Aligned with a cautious Fed outlook, firms like Goldman, JPMorgan, and Commerzbank expect continued dollar weakness. Conversely, BofA and Rabobank maintain a more bearish view on the dollar, suggesting potential headwinds against such bullish projections.
The impending Bank of Japan rate decision could greatly influence the USD/JPY trajectory, particularly given how Fed actions could affect global risk sentiment.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Fed holds rates steady, signaling a cautious approach amid economic uncertainty.
- 02Three FOMC members dissent, indicating differing views on inflation and rate hikes.
- 03Market reaction includes curve steepening, with slight dollar softening observed.
- 04Expectations for future rate hikes have been significantly dialed back in the futures market.
Market implications
Traders should monitor the USD movements closely, particularly against the EUR and GBP, as these pairs react to shifts in U.S. monetary policy. Levels of interest to watch include 1.1500 for EUR/USD and 1.3400 for GBP/USD, with potential adjustments following further economic indicators.
Risks to this view
A substantial shift in the inflation outlook or stronger job data could prompt the Fed to raise rates sooner than expected, invalidating the current dovish sentiment in the market. Additionally, any geopolitical event affecting U.S. economic stability could lead to volatility against the dollar.
EUR/USD — All Desk Targets
| Firm | Stance | YE 2026 |
|---|---|---|
MUFG | Bullish | 1.1800 |
Danske Bank | Bearish | 1.1100 |
UBS | Bullish | 1.1800 |
Articles Fed holds rates steady as three FOMC members dissent Published 19:00 FX Rates United States Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download In what was seen as the closest Fed decision for a number of years, officials opted to keep monetary policy unchanged. Markets still think the Fed will tighten policy at some point, but with two inflation prints and two job reports ahead of the September FOMC meeting, nothing is guaranteed. We still think the Fed will end up holding policy steady well into 2027 James Knightley and Chris Turner Fed holds policy rate at 3-1/2 to 3-3/4 percent The Federal Reserve has left monetary policy unchanged, maintaining the target range for the federal funds rate at 3-1/2 to 3-3/4 percent.
There were three dissenters, with Beth Hammack (Cleveland Fed), Neel Kashkari (Minneapolis Fed) and Lorrie Logan (Dallas Fed) voting for an immediate 25bp rate hike. Remember they were the three that wanted the Fed to drop its “easing bias” at the April FOMC meeting. Going into today’s meeting, markets were pricing a slightly greater than one-third chance of a 25bp hike, while the Bloomberg survey suggested only 2 out of 104 economists polled expected a hike.
The immediate market reaction has been a curve steepening with 2Y yields down modestly and the 10Y yield up fractionally while the dollar has softened a touch. Fed funds futures for September, which had been pricing a cumulative 26bp of rate hikes ahead of the decision, are now pricing 18bp. As was the case last month, the accompanying statement was much briefer than what was published when Jerome Powell was at the helm, coming in at around half of the 320 words averaged at the last couple of Powell-led meetings.
There was nothing new there with the acknowledgement of “solid” activity and “elevated” inflation with a commitment to price stability. In terms of the press conference, Kevin Warsh mentioned that he got the "good family fight" he wanted to see, but in the end, the committee opted for stability by a "large majority." He acknowledged higher nominal and real bond yields, which could perhaps be interpreted as implying the market may have done some of the work for them. Nonetheless, if inflation doesn't cool, Fed rate hikes could be part of the solution – "we will not hesitate to act".
Why they could have hiked, and why they didn’t Today’s decision was the closest call for a number of years. The rationale for a hike today can be summarised as the Fed have missed the inflation target for five years and while some progress has been made, elevated oil prices in an environment of a tight jobs market means inflation may stay higher for longer. The median dot plot from the June summary of economic projections had one hike for 2026 and with the market fully discounting a 25bp move before year-end, the question would be, why wait?
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