Alvin Liew of UOB has outlined the bank's expectations for the Federal Reserve's monetary policy trajectory following the July US Consumer Price Index (CPI) release. According to UOB, market pricing for a 25 basis point rate hike at the September Federal Open Market Committee (FOMC) meeting has decreased to 39.9% from 48.1% as of August 11, based on Bloomberg WIRP data [1].
UOB's base case scenario projects that the Federal Reserve will maintain the current federal funds target rate through the end of 2026, with no changes anticipated during this period. The bank forecasts that the easing cycle will resume in 2027, with two 25 basis point cuts expected in late Q2 and late Q4 of that year. This would bring the federal funds rate down gradually to approximately 3.25% by the end of 2027, which UOB identifies as its estimate for the terminal rate [1].
While the risks to UOB's FOMC outlook have become more balanced following the June and July CPI reports, the bank notes that risks remain modestly skewed to the upside. This is attributed to ongoing geopolitical and energy-related uncertainties, which could still pose non-negligible risks of further policy tightening [1].
CONCLUSION
UOB anticipates that the Federal Reserve will keep rates unchanged through 2026, with gradual easing beginning in 2027. Market expectations for a near-term rate hike have diminished, but upside risks to policy remain due to external uncertainties.