United States: Central Bank keeps rates steady in July
Decision was not unanimous: At its late July meeting, the Central Bank kept the target range for the federal funds rate at 3.50–3.75%, following 75 basis points of rate cuts from August to December last year. However, three board members voted to hike rates.
Fed maintains wait-and-see approach: The Fed decided not to hike despite inflation having remained above the 2.0% target for multiple years and upside risks to the inflation outlook from renewed U.S.-Iran conflict. Weak jobs data for June, the recent tightening in market financial conditions and more-benign-than-anticipated June inflation likely helped stay the Fed’s hand.
Our Consensus is for rates to stay steady: The Fed’s June forecasts suggest the funds rate could be hiked later this year, in contrast to previous projections for monetary easing. Despite this, our Consensus is currently for the rate to end 2026 around its current level, before mild monetary easing in 2027 as inflation fades.
Panelist insight: On the outlook, ING analysts said:
“If we are right, and we do see further evidence of disinflation and cooler jobs data, then we expect to see the market pricing of rate hikes moderate. That could culminate in the Fed leaving the policy rate unchanged for a prolonged period rather than hiking once and then cutting again in 2027 as they are currently projecting within their summary of economic projections.”
Nomura analysts concurred:
“We continue to expect the Fed to remain on hold indefinitely. Warsh appears reluctant to raise rates proactively, and we continue to expect easing inflation momentum to provide cover for a patient approach. That said, a sharp increase in market-implied long-term inflation expectations increases a risk of the Fed reacting hawkishly to signs of stalled disinflation.”