Solid growth and cooling inflation: 3 calls for the US
The desk's base case predicts resilient US economic growth alongside decreasing inflation, with the Federal Reserve likely to implement one final rate hike later this year. According to the detailed analysis from ING, growth is projected at 2-2.5% annually, supported by wealthy consumers while lower-income households face wage stagnation. This narrative, if played out, could solidify the dollar's strength against key currencies as traders position for potential Fed adjustments. However, geopolitical risks, particularly concerning Iran, could alter this outlook dramatically, challenging the growth narrative implied here by ING .
What the desk is arguing
The desk posits that solid growth and declining inflation are set to characterize the US economy, likely prompting one more Fed rate rise in December. Per the full note from ING, economic performance is projected to stay between 2-2.5%, but the distribution of this growth is uneven, with wealthier households driving spending while others struggle with stagnant wages.
This uneven economic landscape reflects a bifurcated market: advanced manufacturing is thriving, contributing to job growth, while labor-intensive sectors face ongoing challenges. Wage growth has dipped to 3%, providing the Fed with room to maneuver, likely leading to just one more rate hike before a prolonged pause in 2027. As noted, the overall economic breadth is concerning, as corrections in asset prices could reveal vulnerabilities.
Where it sits in our coverage
We currently have a consensus target of 1.075 for USD/EUR, with a range from 1.04 to 1.12. Notable targets from other firms include: - jpmorgan: 1.10 by Mar-26 - bofa: 1.04 by Mar-26
The desk's positioning near the upper bound suggests a bullish outlook, aligning with jpmorgan, while diverging from the more conservative view held by bofa.
How other firms see it
Aligned firms like jpmorgan envision similar growth scenarios with a focus on a strengthening dollar, while contrary positions, such as that of bofa, anticipate a more cautious recovery.
The dynamics of the USD/EUR pair will likely mirror this evolving economic outlook, especially as the Fed's decisions unfold against the backdrop of global tensions.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Solid US growth projected at 2-2.5% despite uneven wealth distribution impacting spending.
- 02Cooling inflation expected with wage growth trimming down to 3%, allowing for one last Fed rate hike.
- 03Geopolitical risks, particularly surrounding Iran, pose significant threats to the otherwise stable economic outlook.
- 04Investment trends show divergence, with tech spending thriving while traditional manufacturing lags.
Market implications
Traders should closely monitor the December Fed meeting for signals regarding future rate hikes. Additionally, the positioning of the dollar around the consensus target could indicate whether investors are aligning with a more optimistic or cautious outlook in response to US growth forecasts.
Risks to this view
A shift in geopolitical tensions, especially tied to Iran, could significantly alter market sentiment and the anticipated economic stabilization. Additionally, surprises in inflation data could force the Fed to reassess their cautious stance, leading to an unexpected rate hike or shift in monetary policy.
Articles Solid growth and cooling inflation: 3 calls for the US Published 08:51 United States Translate Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Our base case assumes solid growth, cooling inflation and the Fed hiking once more as Middle East tensions subside. However, if President Trump feels constrained after the midterm elections and hawks within the Administration push for more aggression on Iran, we will face a very different economic outlook. Our bold call envisages an AI revolution James Knightley AI investment could supercharge US economic growth How to read our three calls for 2027 Source: ING "> Source: ING ING's base call: Solid growth and cooling inflation remains our call We continue to expect respectable US growth of 2-2.5% over the next couple of years, but with ongoing bifurcation.
Wealth gains are supporting spending among higher-income households, while weaker wage growth is pressuring middle- and lower-income households. Within business investment, tech-related capex shows little sign of slowing, but appears to be cannibalising investment spending elsewhere and is contributing to the low-hire, low-fire economy. Manufacturing is similarly K-shaped: high-value-added advanced manufacturing is growing strongly and adding jobs, while more commoditised, labour-intensive manufacturing struggles.
The growth story's lack of breadth is a slight concern and creates vulnerabilities, particularly if asset prices correct. Inflation remains above target but should ease as energy costs fall and rents cool. More significantly, labour costs are the biggest cost input for corporate America.
With wage growth dropping to 3%, we see just one more Fed rate rise – in December – before a long pause for most of 2027. Our risky call: Constrained Trump goes all-in for regime change in Iran With President Trump constrained by a Democratic-led Congress, foreign and trade policy remain key sources of risk to our base case. For example, Iran hawks within the Administration could convince him that diplomacy won't work, meaning regime change in Iran is required.
Disruption in the Gulf would then intensify, with energy prices spiking. At the same time, President Trump could demand NATO involvement, applying onerous tariffs on imports from members that refuse to participate in the conflict with Iran. In this scenario, rising inflation could prompt the Fed to raise rates above 5%.
Government borrowing would rise on military spending, but Treasury yields would be held down by 'safe-haven' buying as equity markets plunge. Recession risks would then mount through demand destruction as unemployment climbs. Iran would eventually be weakened sufficiently that attacks cease and energy flows resume.
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