Why we don’t think the Fed will hike rates
The desk believes the Federal Reserve is unlikely to hike rates based on the diverging perspectives within the FOMC and a favorable inflation outlook over the next year. Per the full note by James Knightley, the Fed's dual mandate of maximizing employment and maintaining price stability requires a cautious approach, especially given the current softness in job creation and the housing market. Despite a hawkish tone from half of the FOMC members, the remaining members' skepticism coupled with improving inflation metrics supports our stance for a lengthy pause in rate hikes. The consensus within the market is significantly swayed by these internal dynamics as investors currently anticipate a 25 basis point hike by October 2026 but our position emerges firmly on the side of inaction.
What the desk is arguing
The desk asserts that the Fed will not hike rates, as the labor market remains fragile and inflation is expected to improve. Citing the internal divisions within the FOMC highlighted by Knightley, where half of the committee members express doubts over the need for further tightening, we plan for a prolonged period of stable rates.
Recent job growth averages, which reflect only modest increases, echo hesitance among Fed officials about any immediate hikes. Non-farm payroll growth from January 2025 to February 2026 averaged just 8,500, despite a recent uptick to 188,000 per month, illustrating this uncertainty surrounding labor market robustness.
The alternative read would suggest an imminent hike based on recent inflation quantifications, but our analysis emphasizes the nuanced economic conditions that the Fed uniquely navigates compared to its global counterparts, which tend to focus singularly on inflation targets.
Where it sits in our coverage
Our current consensus target for the USD is 1.075, with notable forecasts including: - jpmorgan: 1.10 by March 2026 - bofa: 1.04 by March 2026
This position aligns closely with the outlook from jpmorgan, who shares a similar bullish stance on USD strength while diverging from bofa, which anticipates a pullback. Our stance on rate stability positions us at the upper bound of the observed spread.
How other firms see it
Firms like jpmorgan and others appear to align with our thesis, believing in the Fed's hold on rates amidst economic caution. Conversely, bofa stands in opposition, emphasizing a likely need for tightening based on varying inflationary pressures.
As the Fed's decisions unfold, the trajectory of USD and potential implications on related currency pairs such as USD/JPY will be critical to monitor for shifts in sentiment and policy impact.
What the calendar says
With no upcoming calendar events that could impose immediate volatility on the market, the focus remains on reaffirming the Fed's current stance as economic indicators roll out. This stability allows traders to assess the macroeconomic environment without the proximate influence of scheduled market-moving events.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Fed unlikely to hike rates amidst soft jobs data and shifting inflation outlook.
- 02Half of the FOMC suggests a cautious approach, supporting the desk's view.
- 03Current market pricing favors a hike by October but the desk argues for a prolonged hold on rates.
- 04Inaction is preferred given the dual mandate of employment and inflation management.
Market implications
Traders should remain alert for shifts in the inflation narrative, aiming to gauge market positioning around the 1.075 level. Additionally, watching how USD/JPY reacts to potential rhetoric from Fed officials can signal sentiment changes in response to labor market updates.
Risks to this view
A sharp uptick in job creation or unexpected inflation prints could force the Fed's hand, prompting reconsideration of our cautious outlook and necessitating realignment with tightening expectations.
Opinions Opinion by James Knightley Why we don’t think the Fed will hike rates 07:05 Rates United States A more hawkish-than-anticipated FOMC meeting fuelled market expectations of a Fed rate hike. But the inflation backdrop should improve markedly over the next 12 months, and the true strength of the labour market remains uncertain. Significantly, half the FOMC don't think the Fed needs to hike, and we agree.
A lengthy pause is our call Weak sentiment in the jobs market, a soft housing market, and declining inflation suggest the Fed will stay on hold The Federal Reserve is not like other central banks Wednesday’s Federal Reserve meeting saw a hawkish shift in the Federal Open Market Committee’s stance. Half the committee now expects to hike rates before the end of the year, versus none back in March. The signal was enough to tip a market already leaning toward tightening: investors now fully price a 25bp hike by October and are well on their way to pencilling in a second move in early 2027.
Fed Chair Kevin Warsh refused to provide his own guidance, but significantly, the other half of the committee doesn’t think the Fed will hike. We agree with them. In an environment where many central banks are hiking interest rates, there’s a tendency to think that the Fed may not be far behind.
We must remember, though, that the Fed has a different setup from the others. The European Central Bank and the Bank of Japan, both of which raised their policy rates by 25bp this month, have a single target: to get inflation to 2% and keep it there. The Fed has that target, but must also maximise employment as part of its mandate.
It needs to optimise monetary policy for two very different goals. Caution is warranted on the jobs numbers Regarding the jobs market, growth in non-farm payrolls averaged just 8,500 per month between January 2025 and February 2026. The past three months saw a rebound in job creation, averaging 188,000 per month.
But it remains concentrated in three sectors: private education & healthcare services, government and leisure & hospitality. However, this rebound in hiring has not shown up in business surveys on hiring intentions, such as in the ISM or NFIB reports, nor in daily job vacancy data from the likes of Indeed. Workers themselves aren’t believing it either, with confidence in the jobs market remaining bleak.
The University of Michigan sentiment index shows a net 54% of households think unemployment will rise over the next 12 months. That’s as bad as the depths of the Global Financial Crisis and both the early 1980s and the early 1990s recessions. So, while the improving jobs numbers are great news, some caution is warranted.
Given the tendency for payroll data to be revised downward during the annual benchmarking exercise at the start of the year, we need to be cognisant of the potential for a reappraisal. Weak jobs turnover points to slowing wage growth Source: Macrobond, ING "> Source: Macrobond, ING Disinflation will increasingly be the theme to watch On inflation, the Fed’s new fourth-quarter 2026 forecast for core PCE inflation of 3.3% is slightly higher than the Bloomberg consensus of 3.1%. Its fourth-quarter 2027 estimate of 2.5% is also 0.2ppt above consensus.
The Fed is predicting higher headline inflation than private sector economists. However, the national average price for gasoline has already dropped from a peak of $4.60/gallon in late May to below $4/gallon today. We expect it to be down to $3.75 by next week, suggesting a negative headline month-on-month inflation print for June and possibly July as well.
It will ease the inflationary pressures that had been building in freight rates. Airline fares should start to reverse their recent large increases. There are undoubtedly issues around semiconductor prices, but the biggest cost input for US corporates is not tech, tariffs or energy.
It's the cost of you and me – the worker. We’ve gone from a situation where, in 2022, there were two job vacancies for every unemployed American to being in balance today. This has taken a huge amount of froth out of wages.
Moreover, the plunge in the quits rate – a measure of labour market churn – means companies are no longer having to pay up to retain staff. Wage inflation of 3% is fully consistent with 2% consumer price inflation. As Warsh said at the press conference, monetary policy doesn’t appear restrictive when considering the robustness of financial markets, but it does in light of the housing market.
That is hugely important, given that the component with the heaviest weighting in the CPI is shelter, at 35%! Shelter inflation is currently running at around 3.5% year-on-year. With home prices barely rising 1% and rents now falling outright in a growing number of states, according to data from Zillow and Realtor.com , we expect this dominant housing component to exert steady downward pressure on overall inflation over the next 12 months.
Then, rounding out the story, we have tariffs. They represent a one-off step change in prices. Now that we've arguably entered a less onerous tariff regime that includes lots of exemptions, we’re increasingly confident that their upward influence on inflation will rapidly fade.
The Dallas Fed believes tariffs are contributing around 0.9ppt to the annual rate of core PCE deflator . As this drops to zero, core inflation should quickly descend. A prolonged pause to next summer is our call We recognise that the Fed has missed its inflation target for the past five years, and Warsh wants to put an end to this trend.
Nonetheless, consumer inflation expectations are within tolerable ranges, suggesting little risk of second-round price effects from the energy spike. Those expectations are likely to fall sharply in light of the latest developments in gasoline prices. Meanwhile, market inflation expectations have plunged, with 10Y breakeven inflation rates in line with their 25-year average, while those for 2Y inflation have dropped below 2.2%.
That implies expectations of rapid disinflation, considering CPI is currently running at 4.2%. Given this situation, we suspect that the next forecast update, due in September, will see far fewer than nine FOMC members predicting a rate rise before year-end. To us, the most likely course of action is for the Fed to hold rates steady for a prolonged period, perhaps until the summer of next year.
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 US Jobs Interest rates Inflation Federal Reserve Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download In this opinion The Federal Reserve is not like other central banks Caution is warranted on the jobs numbers Disinflation will increasingly be the theme to watch A prolonged pause to next summer is our call 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…
Sources & References
How we cover this story