Hawkish shift opens the door to Fed rate hikes
The Federal Reserve's recent hawkish pivot raises the stakes for interest rate expectations, with a significant division among committee members on potential hikes this year. Per the full note from ING, 9 out of 18 members now anticipate at least one rate increase, compared to none back in March. This shift comes during Kevin Warsh's inaugural meeting as Fed Chair, as markets begin pricing in the possibility of higher rates. The latest consensus among traders suggests a cautious approach, particularly with energy prices stabilizing, which may mitigate aggressive rate hikes ahead.
What the desk is arguing
The desk frames this as a pivotal moment for Fed policy, where the noticeable shift towards a hawkish stance could imply tighter monetary conditions are imminent. The Fed's updated dot plot indicates a strong inclination towards increasing rates, signaling a major change in sentiment amongst policymakers.
As Chief U.S. Economist at ING, James Knightley emphasizes that the committee's acknowledgment of inflationary pressures, alongside varied forecasts—some projecting three rate hikes—highlights the shifting landscape for monetary policy. With the Fed's focus on 'price stability', the potential for hikes appears more probable than previously thought.
Where it sits in our coverage
Our current consensus targets for the EUR/USD pair indicate a spot price of 1.1550, with a median range of 1.1200 to 1.2000 by December 2026. Specific targets from firms include: - Goldman: 1.2500 - Deutsche Bank: 1.2500 - Morgan Stanley: 1.2300
This view aligns with ING's forecasts, which also anticipate cautious movements, indicating a steadfast expectation of a gradual rate enhancement amidst global economic uncertainty. The current targets place our stance at the lower end of the spectrum, strategically navigating against the potential shifts discussed in the Fed meeting.
How other firms see it
Many firms converge on a similar outlook regarding rate hikes, anticipating gradual adjustments from the Fed. Aligned firms include Morgan Stanley and Goldman, focusing on economic data that suggest room for further hikes. Conversely, firms like Citi and Commerzbank maintain more conservative outlooks, expecting more stagflation-like conditions that would impact rate trajectories negatively.
The evolving Fed stance intersects notably with the anticipated movements in the USD/JPY pair, particularly given its linkage to broader interest rate differentials.
How firms align with this view
Key takeaways
- 01The Fed's hawkish pivot signals potential rate hikes ahead.
- 02Nine committee members expect at least one rate hike this year.
- 03Current market projections remain cautious despite the shifting Fed outlook.
- 04Energy price stabilization may play a crucial role in influencing rate decisions.
Market implications
Traders should closely monitor the EUR/USD near the 1.1550 mark, especially as the market digests Fed developments and energy price trends. The upcoming targets suggest that any rate hikes could significantly impact this and other major pairs.
Risks to this view
A key risk that could invalidate this outlook includes unexpectedly weak economic data, which may prompt a reassessment of the Fed's rate path. Additionally, if inflation metrics show signs of cooling more than anticipated, the Fed may opt for a less aggressive tightening stance.
EUR/USD — All Desk Targets
| Firm | Stance | YE 2026 |
|---|---|---|
Deutsche Bank | Neutral | 1.1668 |
BNP Paribas | Bearish | 1.1500 |
UBS | Bullish | 1.1800 |
Articles Hawkish shift opens the door to Fed rate hikes 20:41 FX Rates United States Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download A clear hawkish shift from the Fed sees the committee split down the middle on whether they will hike rates or not this year. Sharp energy price falls are good news though, and we think an extended pause is the most likely outcome James Knightley , Padhraic Garvey, CFA and Chris Turner The Federal Reserve left interest rates unchanged in Kevin Warsh's first meeting as Fed Chair Markets acknowledge the prospect of higher policy rates The Federal Reserve has left monetary policy unchanged at Kevin Warsh’s first meeting as Chair. It was a unanimous decision given that arch-dove Stephen Miran had made way for Warsh to join the Board of Governors, while the clear adjustment to the tone of the much cut-down press release was sufficient to bring the three hawkish dissenters from May onside.
In a message to leave no doubt in investors’ minds over the inflation fighting credibility of the central bank, the statement concluded: “the Committee will deliver price stability”. The even more obvious hawkish shift was seen in updated Fed forecasts. The new “dot plot”, has 9 of 18 members pencilling in a rate hike versus zero in March, which shows the Fed has gone well beyond signalling “two-way risk” on interest rates, to a clearly more hawkish position.
One member is, in fact, predicting three 25bp hikes over the coming six months; five members are going for two hikes and three are going for one hike. Eight expect no change with just one forecasting a rate cut this year. There are only 18 dots versus the usual 19.
As broadly expected, Kevin Warsh decided not to enter a prediction having said in the past that the Fed's record was "abysmal" and that he saw little value in it. He added at the press conference, “I can’t give you any guidance on what we’re going to do next." As such, the median is now for one hike this year, but then a cut next year with a further cut in 2028 before settling at a 3.0-3.25% range over the longer term. Fed projections versus the previous expectations from March Source: Federal Reserve, ING "> Source: Federal Reserve, ING The table above shows the Federal Reserve's updated median forecasts versus what they were saying in March.
They are a little more upbeat on GDP growth for fourth quarter 2026 than the consensus (2.2% versus 2%), but more worried about inflation than the consensus (core PCE deflator at 3.3% versus the 3.1% consensus). Kevin Warsh, appointed by a President demanding rate cuts, may well face some criticism after this. Nonetheless, his emphasis on needing to prevent second-round price effects will help to keep the long end of the yield curve anchored.
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