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FX BANK FORECAST · COVERAGE
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Aggregated year-end forecasts, scenario shifts, and curated analyst notes from 36 institutional desks. No promotion.
FX BANK FORECAST · COVERAGE
Aggregated year-end forecasts, scenario shifts, and curated analyst notes from 36 institutional desks. No promotion.
The Federal Reserve's current decision-making leans towards maintaining interest rates, despite rising inflation and economic momentum, as highlighted in recent commentary. Per the full note source, while improved business surveys and job numbers suggest the US economy is gaining traction, the Fed is likely to resist rate hikes in anticipation of potential cost reversals. This cautious approach aligns with concerns of K-shaped recovery dynamics affecting lower-income households and overall consumer confidence, while inflation remains above 4%. With no immediate calendar catalysts ahead, the focus lies on the Fed's upcoming decisions and their broader implications for currency markets.
The Fed seems poised to hold interest rates steady, despite rising expectations for hikes due to inflationary pressures. Per the full note source, the economy appears to be re-accelerating, driven by a combination of better-than-expected jobs data and ongoing investments in technology. However, the potential for household spending constraints is significant, particularly for lower-income families impacted by rising fuel costs.
The current inflation rate, above 4%, suggests persistent cost pressures that may limit the Fed's room for maneuver. The desk takes into account leading indicators from business surveys and labor statistics, which indicate an uptick in economic activity, yet highlights the nuanced challenge of addressing unequal recovery trends among different income groups. This underscores the Fed's need to balance monetary policy against possible adverse effects on consumer spending.
The consensus outlook at present suggests a target of 1.075 for the USD showing mixed sentiment among banks regarding interest rate developments toward year-end. Notably, estimates include: - jpmorgan: target of 1.10 - bofa: target of 1.04
Our desk's perspective on the Fed's cautious stance complements the consensus range but signals attention to how inflation could influence future rate decisions.
Majority sentiment aligns around a steady interest rate outlook, particularly from firms such as jpmorgan focusing on ongoing economic recovery. Conversely, bofa presents a more cautious view, highlighting concerns over inflationary impacts and advocating for tighter policy measures.
In related insights, attention on the USD in relation to upcoming NFP reports or inflation data could provide additional context and reactivity in the currency markets. Observing the EUR/USD will be critical as it reflects both the Fed's approach and the broader economic signals shaping monetary policy.
There are no notable high-impact events scheduled for the near term that would serve as calendar catalysts for significant shifts in the Fed's policy stance. Thus, traders may focus on weaker consumer sentiment indexes or inflation reports as potential indirect influences on Fed decisions.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
Market implications
Traders should watch the USD closely; the current level near 1.075 will be pivotal in evaluating shifts in sentiment should inflation data emerge hotter than expected. Any surprises in upcoming economic reports could sway the Fed's ongoing policy considerations.
Risks to this view
A significant spike in inflation readings could force the Fed's hand towards rate hikes sooner than anticipated, which would challenge the current dovish stance. Surveillance of consumer spending trends will be crucial in assessing real impacts on economic dynamics and inflation.
Articles Federal Reserve to resist the urge to hike US rates 10:46 United States Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Business surveys and improved jobs numbers suggest the US economy has regained momentum, while the surge in motor fuel costs means inflation is likely to average more than 4% in the second half of 2026. Fed rate hike expectations are growing, but we think it will instead choose to hold steady in anticipation of a reversal of cost pressures in 2027 James Knightley Moynihan Train Hall at Penn Station, New York. With inflation now above 4%, the squeeze on household spending power looks set to remain a constraint.
Rate risks on the rise GDP growth was disappointing in the final quarter of 2025 and the first three months of this year, but business surveys suggest a re-acceleration is underway. This view is supported by a recent string of better-than-expected jobs reports and the obvious point that a surge in oil prices is a boon for an energy sector that is able and willing to export. Tech capex relating to the AI story continues to drive business investment, and there appears to be no slowdown in sight based on chip orders.
Meanwhile, consumer spending by high-income households continues apace. With energy prices pushing inflation above 4%, talk of potential Federal Reserve interest rate hikes has understandably increased. K-shaped growth narrative persists That said, there are valid concerns about growth concentration risks – the so-called K-shaped economy.
High-income households, buoyed by substantial wealth gains in recent years, are driving the momentum. For middle and lower-income households, there are growing signs of stress with consumer confidence at 50-year lows, which is remarkable given some of the events that have occurred over that period! This can at least be attributed in part to the fact that real household disposable incomes have fallen for three straight months, prompting greater use of credit cards and reduced savings just to maintain lifestyles.
There is a similar K-shaped story in business investment, which, outside tech-related capex, has fallen for six straight quarters. We even see this narrative in the labour market. Job creation is concentrated in just three sectors – government, leisure & hospitality and private education & healthcare services.
All other sectors combined have seen net job losses over the past three years. The low-hire, low-fire private sector economy means ongoing weak wage growth. The swing towards excess supply of workers and a declining quit rate, pointing to much reduced job turnover, is consistent with nominal earnings growth of barely 3%.
With inflation now above 4%, the squeeze on household spending power looks set to remain a constraint. Weak job turnover points to slowing wage growth Source: Macrobond, ING "> Source: Macrobond, ING Non-energy price pressures to come to the Fed's aid Our oil price forecasts, building on price pressure tied to tariffs and the tech roll-out, mean that inflation will likely stay above 4% through much of the second half of the year. Given the resilience of the economy, we are now in a situation where financial markets are fully pricing a 25bp Fed rate hike this year with a 70% chance of a second hike in 2027.
It is a close call, but while sounding hawkish, we think the Fed will 'look through' the energy-related near-term inflation and choose to hold interest rates steady at a level that a majority of officials still believe is mildly restrictive. We don’t have the consumer demand impetus that would prompt a return of the broad and persistent inflation seen in 2022. Favourable factors are expected to emerge in the second half of the year that will help to mitigate any energy-related spillover effects into core inflation.
Crucially, both financial market and consumer inflation expectations remain within tolerable ranges. Housing is the largest component of the inflation basket by weight, and flat-lining home prices and cooling private rents – both Zillow and Realtor.com suggest rents are falling by around 1.5% year-on-year right now – suggest shelter inflation will slow from its current 3.5% year-on-year rate. The impact of tariffs should also wane.
The Dallas Federal Reserve Bank estimates that tariffs are currently lifting the annual rate of core inflation by 0.9ppt. Tariffs are a one-off step change in prices, and we have since transitioned to a lower tariff regime that includes many exemptions, following the Supreme Court’s decision to strike down 'Liberation Day' tariffs. The refunds of those tariffs will provide relief for corporate America and should go some way to covering any increase in energy/transportation costs they may be facing.
While supply/demand rebalancing will take time, we see greater scope for energy price falls in 2027 that will pull inflation lower. With core inflation looking more benign, there is the prospect that inflation falls back below 2%, giving the Fed room to resume moving policy rates back to neutral next year, although our conviction on the need for any interest rate cuts has receded. US Federal Reserve Content Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives.
The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Author James Knightley Chief International Economist, US James Knightley is the Chief International Economist in New York. He joined the firm in 1998 in London and has been covering G7 and Western European economies.
He studied economics at Durham… In this article Rate risks on the rise K-shaped growth narrative persists Non-energy price pressures to come to the Fed's aid
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