Employ America Forecasts Rate Hike Months Before Federal Reserve Decision

Financial analysts were caught off guard by the Federal Reserve's decision to raise interest rates in May, but one group, Employ America, had been calling for a hawkish turn as early as February. Their forecasting model, which takes into account inflation nowcasting, labor market data, and Fedspeak, correctly predicted the rate hike.

The analysts at Employ America identified three key factors that contributed to their accurate prediction: a bottom-up approach to inflation forecasting, careful reading of labor market data, and understanding of the institutional context of the Federal Reserve. This combination allowed them to anticipate the Fed's pivot away from an easing bias in the spring.

The FOMC meeting in December 2025 had projected cuts for 2026, but Employ America shifted their call to an indefinite hold following the January CPI release. As the data fog from the government shutdown cleared, it became apparent that the Fed was behind the curve on inflation. The analysts noted that tariff pass-through and AI-driven memory and storage bottlenecks were driving inflationary pressures.

The committee's tardiness to acknowledge these developments led Employ America to predict a hawkish pivot later in 2026. Their forecast was based on the fact that rates were only 50bp above their neutral estimate, while inflation was at least 100bp over target. The transition of Chair Powell to Warsh also complicated the picture, but Employ America remained confident in their analysis.