Federal Reserve: Gradual easing path – UOB
Alvin Liew of UOB outlines expectations for the Federal Funds Rate following the July US CPI release. Market pricing for a September hike has fallen, and UOB’s base case is an extended pause through 2026.
UOB analyst Alvin Liew discusses the anticipated Federal Funds Rate path following the July US CPI release. The bank now expects an extended pause in interest rate hikes through 2026, with two 25 basis point cuts scheduled for 2027, bringing the rate down gradually to approximately 3.25% by the end of 2027. After the July CPI release, the probability of a 25-basis point hike in the September FOMC meeting decreased to 39.9% from 48.1% on August 11th, according to Bloomberg WIRP.
UOB maintains its base case that the Fed will stay on pause for the rest of 2026 before commencing its easing cycle in 2027, with two cuts likely in the late Q2 and late Q4 of 2027. At the end of 2026, the federal funds target rate is projected to remain unchanged before declining gradually to the estimated terminal Fed funds rate of 3.25% by the end of 2027.
Although risks to the FOMC outlook have become more balanced after the June and July CPI reports, they remain slightly biased towards the upside due to geopolitical and energy-related uncertainties. Therefore, UOB remains cautious about the potential risks of policy tightening.
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