Macquarie Group, on July 29, suggests that while the Federal Reserve is unlikely to adjust rates at its current meeting, the statement's wording is expected to become more hawkish. David Doyle, Head of Economic Research at Macquarie, noted that this is the first time this year the decision appears less clear-cut, with market pricing implying roughly a 35% probability of a rate hike. The next policy action is most likely to be a rate increase in December, with potential dissenting votes if rates remain steady. The description of the unemployment rate in the statement may become more optimistic, following a slight decline in unemployment data since June's "little changed" wording. Changes to forward guidance could also drive market volatility and reshape investor expectations.
Key areas of focus for the market include any dissenting votes from committee members, changes in the statement's wording, and Chairman Powell's communication style at the press conference. If rates are kept unchanged, dissenting votes are likely, with their number depending on the extent of the hawkish shift in the statement. The risk of further adjustments to the statement's wording is skewed towards a hawkish direction, possibly including a phrase implying a future tightening bias.
Despite this, Macquarie's baseline forecast for a rate hike remains in Q1 2027, although risks are leaning towards an earlier hike, with markets now discounting a hike in Q4 2026. This sentiment reflects a shift from earlier in the year when President Trump's selection of Kevin Warsh to lead the Fed inspired bets on several rate reductions in 2026. However, these wagers quickly recalibrated after geopolitical events in late February. Bond traders are now fully pricing in an interest-rate hike by the end of 2026, implying the Fed's benchmark rate will be at least 25 basis points higher.
