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FX BANK FORECAST · COVERAGE
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Aggregated year-end forecasts, scenario shifts, and curated analyst notes from 38 institutional desks. No promotion.
FX BANK FORECAST · COVERAGE
Aggregated year-end forecasts, scenario shifts, and curated analyst notes from 38 institutional desks. No promotion.
Recent commentary from Kevin Warsh at the Jackson Hole Symposium indicates a significant shift in the Federal Reserve's policy posture, moving from a patient rate-holding strategy to a more hawkish stance where a rate hike appears more likely. Per the full note , the Fed, driven by persistent inflationary pressures, now prioritizes a preemptive hike to ensure inflation returns to target, which fundamentally alters the analysis surrounding the September decision. The new stance suggests that unless the upcoming labor and inflation data are exceedingly weak, a hike is now the default expectation. Notably, the September 4 jobs report and the September 11 CPI print will be critical data points under this new framework.
The shift articulated by Warsh frames an expectation that the Federal Reserve is likely to raise rates unless there is compelling evidence to pause. After the Jackson Hole Symposium, the desk notes that the Fed's conditionality for hiking has dramatically evolved — reflecting a tightening bias amidst ongoing inflation above target levels for 65 months. This marks a notable departure from previous assumptions of sustained patience in monetary policy.
The Fed's current positioning suggests that only an exceptionally unfavorable jobs report or a significantly lower-than-expected CPI might forestall a rate hike. Previously, data supporting a hike was pegged at 75k+ non-farm payrolls; post-symposium expectations indicate hikes might be anticipated even with numbers significantly lower — a major adjustment in outlook highlighting the Fed’s readiness to act against inflation.
Our consensus target for USD/EUR is currently set at 1.075, with a range between 1.04 and 1.12. Notably, firms such as jpmorgan estimate a target of 1.10 for March 2026, while bofa believes a more conservative approach is warranted, issuing a forecast of 1.04 for the same period.
This more aggressive Fed outlook post-Jackson Hole contrasts with the more dovish views held by some market participants, particularly with bofa aligning with a more cautious stance compared to jpmorgan. The positioning reflects a divergence, with the desk's outlook leaning towards hawkish expectations.
The current sentiment has resulted in a split among analyst projections, with firms like jpmorgan and others foreseeing rate hikes as more probable, indicating alignment on the hawkish approach from Warsh's commentary. Conversely, firms such as bofa maintain a bearish view, suggesting the potential for policy pausing amidst economic uncertainties.
As the market digests these perspectives, analysts should keep an eye on the USD/EUR pair, as it is expected to react to any shifts in Fed policy outlook alongside inflation metrics and employment data leading up to the crucial September decisions.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
Market implications
With the Fed's altered stance, market participants should closely monitor the upcoming September jobs and CPI reports for signals that could validate the desk's hawkish outlook. A critical marker of sentiment in the USD/EUR may emerge as rates are recalibrated based on new inflationary data.
Risks to this view
A significant deviation in the September labor or inflation data which shows steep declines in employment growth or core inflation below key thresholds would lead to a reassessment of rate hike probabilities, potentially reversing the current bullish positioning.
Articles Warsh shift points to an ‘insurance’ Fed hike Published 11:40 United States Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Kevin Warsh's Jackson Hole speech has shifted the Federal Reserve's position from hold unless you have to hike, to hike unless you can justify a hold. While our macro projections suggest the Fed can afford to be patient, the shift in stance indicates an appetite for a hike to help ensure inflation returns to target. We see no need for a series of hikes James Knightley Kevin Warsh's Jackson Hole speech has shifted expectations, making a September rate hike more likely than a pause as the Fed seeks to reinforce its inflation-fighting credentials Chair Warsh signals a September hike is more likely than not Ahead of the Federal Reserve’s Jackson Hole Symposium, we were comfortable with the view that the Fed would be patient and hold rates steady well into 2027.
However, Chair Warsh took a notably more hawkish stance in his keynote address. He emphasised a focus on inflation, which has been above target for 65 consecutive months, and a sense that financial conditions aren’t tight in an environment of full employment. Given this, we need to change the way we think about the September Fed decision.
Previously, it was that the Fed would hold unless the data justifies a hike. Now it is that the Fed will hike, unless the data justifies a pause. The shift is subtle, but significant.
There are two key August data points ahead of that decision; the 4 September jobs report and the 11 September CPI print. Before Jackson Hole, we would have said it requires a non-farm payrolls figure of 75k+, the unemployment rate holding at 4.1% with core CPI coming in at 0.3% month-on-month or above to result in a vote in favour of a rate hike. Now, we suspect it will likely require a jobs figure below 25k, possibly even net job losses, with a core CPI MoM reading below 0.2% MoM, to prevent/delay a hike.
While maintaining a forecast of a stable Fed funds rate through to 2027 could be justified based on our growth, inflation and jobs forecasts, the shift in stance needs to be taken on board. After having sounded hawkish in June and then backtracked in July, what would it mean to Warsh’s credibility to have gone hawkish again in August only to turn more dovish in September? His emphasis on trends rather than individual data points also suggests he has made his mind up and, with no-one on the FOMC openly hostile to a rate hike, we have to say that a 25bp increase now looks more likely than a hold.
With Treasury Secretary Scott Bessent watching nervously as longer-dated yields climb, he too is likely to be on board. Even President Trump has seemingly given him a pass, saying "he'll do what he has to do". Although our macro projections suggest the Fed has the room to wait Regarding the macro backdrop, the economy continues to look robust with high-income consumer spending and tech investment the key activity drivers amidst tepid job creation and weak consumer sentiment.
Middle- and lower-income households remain under financial pressure, with real household disposable incomes having flatlined for 18 months and the savings ratio remaining close to historical lows at just 3%. Meanwhile, delinquency ratios for credit cards and auto loans are at record levels. Business capex outside tech remains subdued while imports are set to continue to be a drag as foreign-sourced products are utilised in the tech investment boom.
Higher government borrowing costs are contributing to higher mortgage rates and corporate borrowing costs and this will act as a headwind to overall activity. Inflation has been undershooting expectations recently, but as Kevin Warsh pointed out, it remains above target. The lack of progress surrounding oil and gas flows from the Strait of Hormuz means headline disinflation has stalled, but our geopolitical assessment is that the situation will improve, and oil prices will resume their declines later in the year.
We also expect ongoing progress in the core metrics despite a re-escalation in trade tensions with Canada and anxiety over “chipflation” tied to semiconductor shortages. After all, we remain in a less onerous tariff regime than 12 months ago and $166bn of International Emergency Economic Powers Act (IEEPA) tariff refunds continue to be a cash flow boost for corporate America. Computers, peripherals and telephone equipment (including smartphones) have a weighting of less than 0.7pp in the basket for CPI while the use of hedonic (quality adjustment) pricing will mitigate retail price increases.
The shelter component, with a 35% weighting in the CPI basket, should continue to moderate given the stagnant property market and cooling private sector rents. Supply-side cost pressures should be further mitigated by subdued wage growth. We expect inflation to return to 2% in the summer of 2027.
Weak wage growth unless labour turnover increases Source: Macrobond, ING "> Source: Macrobond, ING We expect this to be a one-off "risk management" hike Ordinarily the assumption is that if the Fed hikes, they don’t do just one. However, this time around we think that may be the case as the soft jobs figures and cooling inflation data calm Fed worries. Market and consumer inflation expectations remain in check, so we see parallels with the late 1990s – cuts in early 1996 before a pause, then one 'risk management' hike in March 1997 before a long pause through late 1998.
US Kevin Warsh 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 Chair Warsh signals a September hike is more likely than not Although our macro projections suggest the Fed has the room to wait We expect this to be a one-off "risk management" hike
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