Fed: On-hold stance with upside hike risk – TD Securities

TD Securities expects the Federal Reserve to keep the Fed funds rate unchanged through 2026, as inflation stays above target and the labor market stabilizes. The bank notes a mixed Fedspeak backdrop, a blurrier reaction function under new leadership, and judges that if policy changes this year, a hike is more likely than a cut.

Rates seen steady, hike risk skew

"June CPI came in far softer than expected last week, signaling underlying inflation is not yet running rampant."

"The report should ease near-term Fed inflation concerns, reinforcing our expectations that policy will remain on hold indefinitely. We have revised down our near-term CPI path, with core CPI ending at 2.6% y/y in 2026 Q4."

"Fedspeak before the blackout period painted a mixed picture on the policy outlook. Chair Warsh characterized last week's CPI report as good news, but far from "mission accomplished," while remaining relatively dovish on inflation risks."

"Waller was open to a July hike if CPI had surprised to the upside but is likely to support a hold after the soft report, while Hammack effectively signaled a dissent in favor of a hike and Logan remained hawkish; Jefferson, meanwhile, struck a more neutral tone."

"We expect the Fed to remain on hold over our forecast horizon. Inflation should remain high for the rest of the year, and the labor market has stabilized, allowing the FOMC to shift focus to its inflation mandate."

"If the Fed were to move this year, we believe that move is more likely to be a hike than a cut. Under a new management that espouses a blurrier reaction function, data dependence will gain prominence for determining the path ahead for monetary policy."