Rates Spark: Hike temptation
Per the full note , ING's rates desk argues the Fed under Chair Kevin Warsh is tempted to hike despite market pricing for no change, citing inflation risks and credibility concerns. The commentary pegs the odds at 60:40 for a hold, but warns that a 25bp hike now would validate Warsh's price stability focus. With no tracked currency pair in our internal coverage, the note focuses on the Fed's dilemma rather than specific FX impacts.
What the desk is arguing
ING's desk does not explicitly call for a hike at the upcoming FOMC meeting, but lays out a compelling case for why one could happen. The thesis hinges on Kevin Warsh's skepticism of forward guidance and his potential preference to deliver a hike before it becomes fully discounted by markets. Per the full note , the expected unchanged outcome is 'practically on a knife-edge, at 60:40 in favour of no change.'
Supporting evidence includes calming June inflation readings, Trump's detente with Iran, and macro vulnerabilities outside tech. Yet the desk notes that longer tenor yields have hit new local highs on real yield angst, and that a hike would 'help validate Chair Kevin Warsh's quest for price stability.' The counterfactual is that the Fed could hold pat as five task forces re-wire the institution, but the desk views this as the tougher call.
What the calendar says
No high-impact events are scheduled in the next 30 days for this jurisdiction, so the immediate focus remains on the FOMC decision itself.
Key takeaways
- 01ING sees a 40% chance of a Fed hike at the upcoming meeting, driven by Warsh's credibility concerns and market pricing.
- 02A 25bp hike now would validate the Fed's price stability mandate and reduce the risk of it being fully discounted later.
- 03Longer tenor yields are at local highs, reflecting real yield anxiety even if the hike odds are below 50%.
- 04The alternative view—that the Fed holds pat due to cooling inflation and macro risks—is acknowledged but considered more difficult to execute.
Market implications
Watch US 2-year yields for further steepening if the Fed delivers a hawkish hold or a surprise hike. The EUR/USD pair may see brief downside on a hike as USD strengthens, but the impact should be contained given market discounting.
Risks to this view
The Fed holds pat and Warsh emphasizes patience, disappointing hawkish expectations and triggering a relief rally in bonds. A sharp equity selloff or renewed trade tensions could also force a dovish pivot, invalidating the hike thesis.
Articles Rates Spark: Hike temptation Published 07:40 Rates Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download We don't call for a hike, but can see how it could happen. Kevin Warsh does not believe in forward guidance. He might also have a preference not to slavishly deliver the market discount.
If so, and if Warsh is minded to hike (maybe he is), better to do it now rather than 'risk' it being fully discounted at a subsequent meeting. Where's the nouveaux Fed in that? Padhraic Garvey, CFA Fed Chair Kevin Warsh Even the expected unchanged outcome from the Fed would contain an elemant of surprise The upcoming FOMC meeting will be the first in quite some time that a large portion of observers will get an outcome they did not anticipate.
It's practically on a knife-edge, at 60:40 in favour of no change. The logic for no change centres, in part, on the calming in June inflation readings. President Trump has also helped pave an unchanged bias given the seeming renewed halt to hostilities with Iran.
And from a macro perspective, the US economy is exhibiting vulnerabilities outside of tech. Add to that the five task forces now working on re-wiring the Fed, and an unchanged outcome is rational – just hold pat for now. That said, the Federal Reserve could be forgiven for lobbing a protective hike in.
It's what central banks tend to do when there is a perceptible rise in inflation over and above preferred ranges. The market has been paving a path towards a hike for this reason, as it's the logical market discount to have. Betting that the Fed will absolutely not hike at all in the coming months is the far tougher call to make.
The fact that longer tenor yields have hit new local highs points to a degree of angst, even if that has come primarily from higher real yields. Importantly, a 25bp hike would help validate Chair Kevin Warsh's quest for price stability, with enhanced credibility to boot. There is also a scenario where the committee votes by a majority for a hike, but Warsh remains aloof on the decision.
After all, he does not have a dot in the dot plot, and he has actually not telegraphed whether he's in a hawkish or dovish mood. If the committee did deliver a hike, Kevin Warsh would probably not expressly endorse the move, but rather simply deliver it. He did the same when he delivered a "no change" outcome at the previous FOMC meeting.
This is why this meeting is actually quite pivotal, and even more so if there was a hike delivered. From Warsh's perspective, it would be a classic "no forward" guidance move, which must be tempting. Our call is for no change.
We see inflation expectations tame enough for comfort. Also, the structure of the curve does not shape up for a rate hiking cycle. Specifically, the 5yr is rich to the curve.
It's unusual for the Fed to start a rate hiking cycle with the 5yr rich to the curve. If we're wrong and the Fed does hike (whether at this meeting or the next), the curve structure suggests that any hikes delivered will be subsequently reversed, and the funds rate ends up lower than it is today within a 12-month window. One final point – if Warsh is minded to get a hike in (and maybe he is), better to do it at this meeting than to wait for it to be discounted by the market at the next one.
The temptation to show some Fed independence vis-à-vis the market must absolutely be there. For clarity, we don't call for a hike. But the 60:40 breakout gives Warsh a choice price to deal with, and he might just want to make a splash.
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 Padhraic Garvey, CFA Regional Head of Research, Americas Padhraic Garvey is the Regional Head of Research, Americas.
He's based in New York. His brief spans both developed and emerging markets and he specialises in global rates and macro relative…
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