Federal Reserve: Extended pause but hike risk rising – UOB

UOB strategists expect the Federal Reserve (Fed) to keep the Fed Funds Target Rate at 3.50%–3.75% at the July Federal Open Market Committee (FOMC) meeting and maintain a base case of an extended pause through 2026, with easing only in 2Q and 4Q 2027 once transitory inflation fades. However, markets now price a meaningful probability of a 25 bps hike as Oil-driven inflation risks rise.

Policy on hold while markets price hike odds

"In line with Bloomberg consensus, the Fed is expected to keep its Fed Funds Target Rate (FFTR) unchanged at 3.50%–3.75% at the July meeting."

"With a divided FOMC and ongoing reviews across five task forces, the base case remains an extended pause through 2026 before resuming easing in 2Q and 4Q 2027, once transitory inflation fades."

"That said, risks of rate hikes are rising, with inflation data and geopolitical developments key to shaping future expectations."

"The recent resurgence in crude oil prices has led markets to price in a meaningful 35.8% probability of a 25bps hike at the July FOMC."