August 2026 Fed & Rates Call Update

The Fed to remain on hold for the balance of 2026 = pushing up our forecast levels...

1. We do not see the urgency to re-start hikes and, therefore, we expect the Fed to remain on hold through 2026

2. We update our Fed call and push back our easing expectations into early 2027

3. We update each tenor point estimate, revising forecasts higher by 25-50bps 

4. Net, we argue that the US rates market is in an overshoot mode that is creating value

• We have been maintaining a checklist heading into the Jackson Hole Symposium and the September FOMC meeting to help steer our Fed view in the right direction. From a macro perspective, the data has looked notably weaker since the last FOMC meeting, with both nonfarm payrolls (NFP) and retail sales growth coming in negative in July. Granted, inflation has likely not eased by enough to completely dissuade the hawks, with core CPI rebounding a bit in July after a very weak June, but wage growth has fallen down to levels consistent with 2% inflation and there is little to no added thrust from tariffs and energy prices going forward.

• From a markets perspective, rate hike expectations have declined while long-term rates have meaningfully increased, doing some of the tightening for the Fed. We still have Jackson Hole and the August NFP/CPI data releases to get through, but given the most recent economic developments, we do not see inflationary pressures re-surfacing strongly enough to warrant immediate Fed hikes. In general, we do not see the urgency to hike into what has largely been a supply shock environment.

• Fed Rate Path Implications: We expect hawkish tension at the Fed to keep near-term rate hike expectations priced-in but not delivered. Though we do not expect Fed hikes to materialize, rate hike expectations priced into money market related futures won't fully fade until there is a resolution to the US/Iran war and/or inflation materially drops. Instead, they will trade in a 30-60% probability range of a 25bp hike in each upcoming FOMC meeting. As the year progresses and 2027 approaches, we see markets pivoting back to pricing in cuts.

• US Rates Forecasts: Given the change to our Fed rates outlook, balanced against all of the fundamental and technical factors impacting the bond market, we have made a series of adjustments to our point estimates across the curve. We shifted most tenors upward by a range of 25-50bps in all quarters through our forecast horizon. We still argue that the US rates market is in an overshoot mode, where the current higher rate levels are creating value in the bond market.