Fed holds rates steady despite inflation being too high
The desk interprets the Federal Reserve's decision to maintain interest rates as indicative of a cautious yet deliberate approach to inflation management, with a potential December rate hike still on the table. As Fed Chair Kevin Warsh emphasized, while inflation remains elevated, senior officials are advocating for a measured approach to future policy changes that could impact the USD significantly, particularly against the EUR and GBP (per the full note ). The market hasn't shown much reaction to the latest decision, reflecting the limited expectations for immediate changes, which aligns with the broader consensus that anticipates an eventual hike in December as economic conditions evolve.
What the desk is arguing
The desk argues that the Fed's decision to keep rates steady illustrates a cautiously optimistic approach to current inflation levels, a stance echoed by Fed Chair Warsh. While a 10-2 vote to maintain the Fed funds target at 3.75%-4% was expected, the indications of a potential December rate hike suggest ongoing vigilance on inflation metrics. The decision to keep rates steady reflects the broader sentiment among key Fed officials who are weighing the necessity of immediate action against the backdrop of stable economic expansion.
The commentary highlights a strong economy contrasted with persistent inflation, as indicated by Warsh's acknowledgment of rising prices. The Fed is emphasizing data dependency in its decision-making, leaving the door open for further action, which will likely keep USD investors alert as they gauge economic indicators leading into the end of 2026.
Where it sits in our coverage
In the context of our internal coverage, the current consensus for the EUR/USD stands at 1.1253, with a target median of 1.1500, ranging from 1.1162 to 1.2000 as anticipated by various firms. Specific targets from analysts include: - Rabobank: Dec26 1.1800 - RBC: Dec26 1.2000 - Mizuho: Dec26 1.1600
This viewpoint aligns with the forecasts from several firms, indicating a steady outlook as markets digest the Fed’s cautious tone. Our internal consensus thus situates the market well below the upper bound but acknowledges the room for potential upside if inflation persists in shaping policy discussions, should the Fed signal urgency.
How firms align with this view
Key takeaways
- 01The Fed maintains rates at 3.75%-4%, reflecting cautious optimism amid elevated inflation.
- 02A December FOMC rate hike remains plausible, contingent on further economic data.
- 03Key Fed officials advocate for a data-driven approach to policy, indicating ongoing vigilance.
- 04Market expectations were aligned with the Fed's decision, resulting in limited market volatility.
Market implications
Traders should monitor USD movements against the EUR and GBP as the Fed's cautious stance could lead to fluctuations around the current spot. The levels around 1.1253 for EUR/USD and 1.3464 for GBP/USD will be key areas of focus, especially if inflation data shifts before the December meeting.
Risks to this view
Should inflation indicators show a rapid decrease or if economic growth unexpectedly decelerates, the narrative around a December rate hike could shift dramatically. Additionally, any major geopolitical events or shifts in fiscal policy could introduce volatility that might reverse the current USD positioning.
EUR/USD — All Desk Targets
| Firm | Stance | YE 2026 |
|---|---|---|
Rabobank | Bearish | 1.1000 |
ING | Bullish | 1.1300 |
MUFG | Neutral | 1.1200 |
Articles Fed holds rates steady despite inflation being too high Published 18:59 FX Rates United States Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Fed Chair Kevin Warsh acknowledged that progress is being made, but inflation remains too high and a December FOMC rate hike remains our call James Knightley , Padhraic Garvey, CFA and Chris Turner Federal Reserve Chair Warsh announced that interest rates remain unchanged 10-2 vote to keep policy unchanged The Federal Reserve voted 10-2 in favour of leaving the Fed funds target rate range at 3.75%-4%. Only 2bp of a potential 25bp hike was priced ahead of the decision and only 6 of 97 organisations polled by Bloomberg predicted a hike, so this was no surprise and market reaction has been limited. Senior Fed officials, including Vice Chairs Philip Jefferson and Michelle Bowman and Governor Chris Waller, suggested ahead of the decision that they were prepared to move cautiously, seeing little need for back-to-back rate hikes after September's policy change.
Nonetheless, Beth Hammack and Lisa Cook both felt that the current situation warranted additional action. Cook’s vote for a hike was a surprise given the general sense that she was a centrist, and it will do nothing to improve her fraught relationship with President Trump. Instead, we had suspected it would be one or both of Neel Kashkari and Lorrie Logan (who both also dissented in July) that would join Hammack in voting in favour of a further rate hike.
There aren’t many changes in the accompanying press release, with the economy described as “expanding at a strong pace” and “inflation remains elevated”. There was no pre-commitment to further action, with it being the data that “will help the Committee determine the policy stance appropriate to ensure a timely return of inflation to the Committee's 2 percent goal." At the press conference, Kevin Warsh offered no real guidance other than to say that inflation remains too high, but the overwhelming consensus in the FOMC is that the “medicine” is starting to work. Moreover, the Fed will deliver price stability, “no ifs, ands or buts." He did state that from next September one FOMC meeting won’t have a rate vote, leaving it to focus exclusively on monetary policy strategy.
From 2028, this will become two meetings, leaving only six meetings at which interest rate decisions will be made. US inflation and unemployment Source: Macrobond, ING "> Source: Macrobond, ING December rate hike remains the most likely path There is the valid question that, given a majority of FOMC members project a rate hike before the end of the year, why didn’t they take that decision today? Kevin Warsh’s response was that he himself didn’t make a prediction and, in any case, they removed some policy accommodation in September.
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